ETF liquidity is driven by underlying securities, not trading volume, allowing even lower-volume funds to handle large transactions through creation/redemption mechanisms. Understanding this structure and using proper trading techniques—like limit orders and issuer support—helps investors optimize execution and fully leverage ETFs’ advantages.
Key takeaways:
- ETFs function in a distinct ecosystem that fundamentally differentiates them from individual stocks and closed-end funds.
- Liquidity extends beyond visible trading volume, allowing even funds with lower daily trading volume to accommodate larger transactions.
- Use limit orders when trading ETFs, time your trades carefully, and contact the issuer for large transactions to access better liquidity.
Exchange-traded funds (ETFs) offer investors a range of advantages, including intraday trading flexibility, efficient access to markets, and the potential for lower costs. Among these benefits, liquidity stands out as one of the most critical features—yet it remains one of the most misunderstood aspects of ETF investing. A deeper understanding of ETF liquidity can help investors navigate the market more effectively and fully leverage the structural advantages ETFs provide.
Understand ETFs’ unique market structure
Liquidity refers to the ease and speed with which a security can be bought or sold at a fair price. ETF liquidity is primarily driven by the liquidity of the underlying securities within the ETF, rather than by the ETF’s asset size or trading volume. This structure makes ETF liquidity much more dynamic and responsive to client trading needs.
While both ETFs and individual stocks trade on stock exchanges, many investors mistakenly assume that the factors determining their liquidity are the same. Unlike stocks, which have a fixed supply of shares, ETFs are open- ended investment vehicles with the ability to create or redeem shares in the primary market based on investor demand.
This creation and redemption mechanism gives ETFs greater flexibility and depth of liquidity, setting them apart from other exchange-traded instruments. Liquidity providers (market makers and authorized participants) can leverage the primary market to create or redeem ETF shares directly in response to client trading. This process allows access to the underlying basket of securities and provides a path to scale execution beyond displayed volumes.
Basic ETF market structure
Consider your trading approach and be mindful of timing
When trading ETFs, investors should consider their price sensitivity and urgency. The execution strategy employed should align with those expectations. If accessing on- screen liquidity, consider using limit orders rather than market orders. A limit order allows you to buy or sell a specific number of shares at a set price or better, giving you greater control over execution and helping avoid sub- optimal executions that can come with market orders. Market orders, which execute immediately at the best available price, may have unintended market impact, especially in fast-moving or thinly traded markets.
In addition to order type, timing plays a key role in trading efficiency. ETF spreads tend to widen during periods of price uncertainty, when it is more difficult for market makers to hedge the underlying securities—such as just after markets open, as price discovery occurs. During these times, reduced liquidity in the underlying securities can result in less favorable pricing and wider bid-ask spreads. Planning trades around these market dynamics can lead to more efficient execution.
Look to your ETF issuer for support, especially for larger trades
When executing larger trades, it can be helpful to work closely with your ETF issuer rather than navigating the process alone. Most issuers have dedicated capital markets desks whose primary role is to facilitate efficient trading and liquidity access for investors.
These specialized teams serve as the critical link between a fund’s portfolio managers, authorized participants, market makers, custodians and exchanges. Their expertise can help guide investors on how best to execute trades in a cost-effective and efficient manner, optimizing trade execution and minimizing market impact. Your issuer’s capital markets desk can be a valuable resource for any ETF trading or liquidity-related inquiries, whether you need insights into market conditions, pre-trade analytics or educational insights.
Navigate ETF liquidity with confidence
Whether navigating trades in active or passive ETFs, retail or institutional-sized orders, leveraging the expertise and resources of your ETF issuer can lead to more precise execution and greater confidence in your investment outcomes.
With the right tools, insights and strategies in place, investors can take full advantage of the flexibility, transparency and efficiency that ETFs are designed to deliver.
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Index definitions and important disclosures
There is no guarantee that any historical trend illustrated/referenced above will be repeated in the future, and there is no way to predict precisely when such a trend might begin. There is no guarantee that any market forecast set forth in this commentary will be realized. The views and opinions in the preceding commentary are as of the date of publication and are subject to change. Diversification does not ensure a profit or guarantee to protect against loss. There is no guarantee that actively managed investments will outperform the broader market. This material represents an assessment of the market environment at a specific point in time and should not be relied upon as investment advice, does not constitute a recommendation to buy or sell a security or other investment, and is not intended to predict or depict performance of any investment.
This material is not being provided in a fiduciary capacity and is not intended to recommend any investment policy or investment strategy or take into account the specific objectives or circumstances of any investor. We consider the information in this presentation to be accurate, but we do not represent that it is complete or should be relied upon as the sole source of appropriateness for investment. Please consult with your investment, tax or legal professional regarding your individual circumstances prior to investing. The views and opinions expressed are not necessarily those of any broker/dealer or its affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules or guidelines.
Foreside Fund Services, LLC, is the distributor of Cohen & Steers Active ETFs. Cohen & Steers Securities, LLC, is the distributor of Cohen & Steers funds. Cohen & Steers Capital Management, Inc. is the advisor. Foreside Fund Services, LLC, is not affiliated with Cohen & Steers Securities, LLC, or Cohen & Steers Capital Management, Inc.
Investing involves risk, including possible loss of principal.
Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus or summary prospectus and other information about the Cohen & Steers active ETFs, please call (888) 737-6370; for Cohen & Steers open-end funds, please call (800) 330-7348. Read the prospectus or summary prospectus carefully before investing.