An ETF’s buying and selling quantity will not be the only and even the perfect determinant of its liquidity.
In a latest convention name with American Century’s Senior Vice President Ed Rosenberg and VP Sandra Testani, the agency sat right down to, amongst different issues, dispel a number of frequent myths surrounding ETF liquidity.
As buyers more and more pour belongings into ETFs – new web flows reached a document $65 billion in Could – many are nonetheless gauging ETF liquidity via the fallacious lens. Utilizing buying and selling volumes to guage how simple it will likely be to purchase and promote is frequent apply for particular person shares, however an ETF behaves in another way, and due to this fact can’t be judged in the identical method.
How ETF Liquidity Differs from a Inventory’s
Since ETFs are baskets of securities that commerce repeatedly all through market hours, they’re in a position to shift dynamically to satisfy market developments.
“That is largely because of the means of an ETF to situation or withdraw shares, in accordance with provide and demand dynamics amongst buyers,” explains American Century.
As a result of the ETF can alter the variety of shares out there as wanted, it’s not correct to measure liquidity by buying and selling quantity alone.
What’s extra, the liquidity of the ETF will not be solely outlined by how the automobile itself trades on an alternate, but in addition by the buying and selling patterns of the underlying securities it comprises. If the underlying securities exhibit strong liquidity, the liquidity of the ETF itself shall be heightened.
Because of this, on-screen liquidity metrics are indicators solely of “what already has traded, not what may have traded,” explains American Century.
NAVs Don’t Matter as A lot When Measuring Quantity
One other key level: the buying and selling value, or deal with, of an ETF can improve quantity—with out offering a lot impression on liquidity.
“Share quantity will increase dramatically in lower-priced ETFs,” states American Century. “The decrease the share value, the better it’s to exhibit excessive quantity.”
For instance, the share value for a brand new fund launch can vary from $10 to $100. An investor with a set $10,000 to spend can due to this fact buy extra shares of the cheaper ETF than the dearer one. That, in flip, results in a bigger commerce dimension – and the notion of upper quantity.
“NAV performs an enormous half in ETF volumes, notably when higher-priced ETFs compete towards ETFs with share costs on the decrease finish of the spectrum,” stated the agency. “Whereas it seems higher-priced ETFs have decrease volumes, it’s actually the precise {dollars} traded that matter.”
American Century Investments handles greater than $230 billion in belongings. It was additionally the primary asset supervisor to introduce semi-transparent, actively managed ETFs to buyers and the primary to launch actively managed environmental, social, and governance (ESG) ETFs again in 2020.
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The views and opinions expressed herein are the views and opinions of the creator and don’t essentially replicate these of Nasdaq, Inc.