THE TRUE LIQUIDITY OF ETFS: IMPLIED LIQUIDITY
One of the most common misconceptions about ETFs is mistaking trading volume for liquidity. ETF trading volume is NOT equal to ETF liquidity. This is a crucial concept to understand when analyzing ETFs and perhaps one of the most critical considerations when assessing an ETF investment. Compared to some of the longer standing ETFs in the market, many ETFs are not as actively traded and have lower assets under management (AUM). This may cause investors to look elsewhere, as they believe the liquidity in the ETF is not sufficient to trade, but this could not be further from the truth.
ETFs are at least as liquid as their underlying basket of securities. There is a more comprehensive way to measure how liquid an ETF is than simply looking at the average daily volume of the ETF itself, and that’s implied liquidity.
With ETFs, implied liquidity is a forward-looking, whereas trading volume is backwards looking. Implied liquidity provides an indication of how much of an ETF can be traded in the future, while trading volume only looks at how much was traded in the past. It evaluates the liquidity of the underlying holdings of the ETF and how many ETF shares can be traded without a bigger cost impact. What determines the liquidity of an ETF are the liquidity of underlying securities; derivatives based on the ETF; and different trading vehicles, such as similar ETFs, swaps, futures, options, and structured products.
Originally published at franklintempleton.ca.
LES CRAINTES INFLATIONNISTES DANS L’APRÈS COVID-19
L’une des erreurs les plus courantes au sujet des FNB est de penser que le volume de négociation est synonyme de liquidité. En fait, le volume de négociation d’un FNB n’est PAS équivalent à son degré de liquidité. Par conséquent, il est important de bien comprendre ce concept avant d’analyser des FNB et, par le fait même, d’évaluer un placement dans un tel produit.
Publié initialement sur franklintempleton.ca.
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