What is ETF Liquidity and Why is It Important?

What impacts ETF trading liquidity and what investors need to know. Read more.


Often, investors examine average daily volume (ADV) of an ETF as a basis for liquidity. ETF liquidity is how easily shares can be bought or sold without impacting the price. While ADV, or historical on-exchange volume, over a specific time-period adds to the overall liquidity profile of the ETF, it’s important for investors to look through the ETF structure to the underlying basket of securities. The underlying basket is the true baseline of ETF liquidity and can offer investors a sense of ETF shares that could be traded in the future.

Implied Liquidity: is an industry-standard metric that evaluates the liquidity of the ETF basket of securities and extrapolates the volume of those securities into ETF terms. The goal of this often-used metric is to provide a baseline of how many ETF shares can be traded through the underlying basket before impacting the price of the least-liquid security in the basket. Many ETF data sites provide the implied liquidity metric for funds with equity-based underlying securities. It’s important to remember that implied liquidity is a baseline and total ETF liquidity is often much greater.

Total ETF Liquidity: is the sum of all the instruments that ETF liquidity providers have at their disposal and transfer back to ETF investors. This includes the ADV of the ETF, the underlying basket, futures and other derivatives, and other highly correlated ETFs.

ETFs are unique vehicles that are easily accessible asset allocation tools for investors. Although easy to access, only a small fraction of ETF liquidity is available through the exchanges, and the most important takeaway for investors is understanding how to access the full pool of liquidity an ETF offers. To effectively access available ETF liquidity, contact your platform or brokerage trading desk or the ETF capital markets desk.


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Michael Barrer
VP, Head of ETF Capital Markets
Matthews Asia



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