How liquid are ETFs?

It depends. In general they are more liquid than mutual funds, but in most cases they are still not as liquid as single securities (with important exceptions like SPY). ETFs not only provide the same diversification benefits as mutual funds but they can also be traded during market hours, unlike mutual funds which wait till the end of the day to be priced. This makes ETFs a convenient investment vehicle as investors can access cash flow whenever needed.

The primary factors of an ETF’s liquidity are the composition of assets and the trading volume of the individual assets within the ETF. For example, an ETF will have low liquidity if its underlying assets are not frequently traded or if the assets are too correlated. As a result, ETFs that hold mega-cap equities are the most liquid as trading volume is high for the underlying securities.

The secondary factors that determine an ETF’s liquidity include its own trading volume and the general macroeconomic environment. Trading activity is dependent on the supply and demand of financial securities, therefore the trading environment will affect an ETFs liquidity.

However, companies that issue ETFs have the ability to generate additional shares, which solves the liquidity problem in a short period of time.

Essentially, ETFs have different levels of liquidity based on the securities it holds, the trading volume of those securities, the trading volume of the ETF and the trading environment.

The most actively traded ETFs are the S&P 500 SPDR (SPY), Invesco QQQ (QQQ) and Financial Select SPDR (XLF), which only covers the financial sector of the S&P 500.