How liquid are ETFs?

‘Liquidity’ means the ability to convert an asset into cash quickly, without significant loss of value (high volume marketplaces are typically more liquid). Exchange-traded funds (ETFs) are more liquid than traditional mutual funds by definition because they can be bought and sold at market prices throughout the day, rather than just once at day's end. However:

  • The market price of an ETF at any given moment can vary from the net value of its underlying securities. Thanks to the arbitrage mechanism underlying the structure of ETFs, such variations should be relatively minor (except in unusual circumstances - see ETF discounts and premiums).
  • Highly specialized ETFs (e.g. those targeting a very specific sector) may be less liquid, and therefore more costly to trade (wider bid/ask spreads) than broad market index ETFs. This is because the securities in the index underlying those ETFs are themselves less liquid (more thinly traded).
  • Note that ETF prices – like most investments - are based on supply and demand, and have yet to be tested in a severe market downturn.