The liquidity of Exchange Traded Funds (ETFs) comes from the liquidity of their underlying securities. As long as the underlying securities of the ETF are trading, the creation/redemption process will function appropriately. If investors were to assess an ETF’s liquidity on the basis of its trading volume, rather than the trading volume of the underlying securities, they would be greatly underestimating the real liquidity of the ETF.
Moreover, for ETFs, a wider bid/ask spread isn’t necessarily a red flag. Investors may assume that if an ETF has a wide bid/ask spread it may be illiquid, but it may be wrong to apply the rules of stocks to ETFs. It’s important to understand four factors that can influence the bid/ask spread of an ETF:
- The trading volume in the secondary market
- The spread between the bid and ask price of the underlying securities
- The cost of hedging investment exposure
- The cost of creating or redeeming shares
Watch our video summary of key facts about ETF liquidity, including the redemption and creation process.
For a deeper dive, read the paper The Right Way to Assess ETFs’ Liquidity, or view the infographic ETF Liquidity: Like a Stock, But Not Quite, and explore our product lineup of Oppenheimer Factor Weighted ETFs.
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Investment in an ETF is subject to investment risk and the possible loss of principal.
These views represent the opinions of the portfolio manager at OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.