Part 4: Deciphering ETF Liquidity: Beyond Volume – Just in case you missed it here are the links to Part 1 our Pilot and Part 2 ETF V Mutual Fund and Part 3 Structures: NAV
Building on our last post that included the NAV – Net Asset Value discussion – the TRUE value of the assets within the ETF.
Trading Volume and Liquidity Volume
Trading Volume is the number of shares that are traded on the exchanges. In many cases literally millions of shares trade daily. BUT there is also liquidity volume.
Liquidity volume is necessary when there are an excess amount of shares of an ETF that are desired and new shares must be created in order to meet the demand. In ETF’s that have highly traded underlying assets i.e. very active Stocks or the like, this expansion is not a problem. As different types of less liquid ETF’s have been created, there are situations where the underlying assets is not as available and thereby quick creation of additional shares is NOT available. In this situation, there can be great differences in the NAV and the actual price of the ETF. Of course these discrepancies usually occur during times of stress or uncertainty.
Said simply, when one side of the trading volume gets too high (buying or selling) more shares of the ETF need to be created or sold. This brings into question the underlying assets of the ETF. If the assets are easily accessible, no problem, BUT if not, there could be giant deviations from the NAV or true value of the assets in the ETF.
So this was a little heavy, but important in the continued discussion of the ETF, its structure, usage and analysis…. Oddly after just a few posts, you likely now know more than most investors out there- Yay – More to come!
John A. Kvale CFA, CFP
AI Content Authenticity: AI created the splash picture. All of the following text content has been completed by myself and has not been edited or created by AI. Occasionally we do use AI for images and will note when appropriate.
Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth
Management firm.
