Dispelling Myths Around ETF Liquidity

Investors often associate fund size or trading volume with ETF liquidity. This leads to the assumption that newer funds (i.e. funds with small amounts of assets under management or low trading volume) will be difficult to trade. This is not always the case.  

ETF liquidity is determined mainly by the liquidity of its underlying holdings, or its “primary liquidity.” How much an ETF trades within a given day, its “secondary liquidity”, is a lesser factor. Often, when an ETF is new, secondary liquidity can appear small, yet primary liquidity may be deep - thus providing investors with the opportunity to achieve great execution of orders both large and small.   

Some best practices when trading ETFs:

For most individual investors, we recommend using a limit order. A limit order places a maximum price to be paid (for a buy limit order), or a minimum price to be sold (for a sell limit order).  It’s akin to saying “only trade if we get this price or better.” To choose a limit order price, we recommend looking at the current best bid/ask quote. As a buyer, you may want to set a limit just below the current ask. As a seller, you may want to set a limit just above the current bid.  

Note that there is the chance your trade does not get executed if the market moves, and you may need to update your limit to accommodate for this. We would also recommend against using market orders for ETF trading. Market orders, especially those placed early and late in the trading day when the order book is thin, have the potential to execute at a significantly worse price, leading to poor execution.  

When trading ETFs, it‘s important to look beyond daily volume, and other on-screen indicators to assess liquidity. For any questions related to Kurv ETFs, including executing trades, please reach out to info@kurvinvest.com.  

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