💧Trading in the Flow - Navigating ETF Liquidity

Happy Sunday ETF UNO readers! It's always a pleasure to touch base with our savvy community, and we’re thrilled to introduce a new series in our newsletter: "ETF 101." This "ETF 101" series demonstrates our commitment to equipping you with a deep understanding of ETF investing. We want to provide the essential basics and delve into advanced concepts. In today's article, we'll explore a fundamental yet nuanced topic that frequently surfaces in financial conversations - liquidity, specifically in the context of ETFs.

What Exactly Is Liquidity?

In the financial world, liquidity refers to how easily an asset can be bought or sold in the market without affecting its price. Cash is often considered the most liquid asset because it can quickly be used to purchase goods or services.

Market liquidity measures how easily an asset can be traded due to supply and demand conditions. For ETFs, sufficient market liquidity is key for efficient trading. Even if an ETF holds highly liquid assets like cash, the ETF itself may not be liquid due to low market demand. When evaluating ETFs, we focus on the fund's own market liquidity, not the liquidity of its underlying holdings. This distinction matters because an ETF's trading dynamics are driven by market activity within the ETF itself. Investors need to analyse the specific supply and demand for an ETF to determine if it can be traded easily.

📜How to Measure ETF Liquidity

To accurately assess an ETF's liquidity, it's essential to consider a blend of vital metrics:

• AUM (assets under management) - The total value of assets the ETF holds. Higher AUM indicates more investor interest and trading activity.

• Trading volumes - This tells you how many shares of an ETF are being bought and sold on a daily basis. Higher volume makes it easier to buy and sell shares.

• Bid-ask spread - The bid is the highest price a buyer is willing to pay for an ETF, and the ask is the lowest price a seller is willing to accept. A narrower spread often means higher liquidity, as it suggests a closer agreement on price between buyers and sellers.

• Turnover Ratios: This ratio indicates how often ETF shares are bought and sold over a period. A higher turnover ratio can be a sign of higher liquidity.

At ETF UNO, we aim to offer understandable and well-rounded perspectives on ETF investing. This is why we have simplified complex concepts, such as liquidity, in our introductory articles by creating a user-friendly 1-5 rating system in the radar charts. The liquidity score helps readers quickly evaluate how efficiently an ETF can be traded by synthesizing key factors.

🏆Top ETFs by Liquidity

Now that we've explored the key metrics for evaluating an ETF's liquidity, let's see those factors in action.🔝

1. SPDR S&P 500 ETF (SPY)

2. Invesco Nasdaq-100 Index ETF (QQQ)

3. iShares Core S&P 500 ETF (IVV)

4. Vanguard S&P 500 ETF (VOO)

5. Vanguard Total Stock Market ETF (VTI)

6. Vanguard FTSE Developed Markets ETF (VEA)

7. iShares MSCI Emerging Markets ETF (EEM)

8. iShares Russell 2000 ETF (IWM)

9. SPDR Gold Shares (GLD)

10. iShares 20+ Year Treasury Bond ETF (TLT)

You may notice the ETFs in bold have been featured in previous ETF UNO newsletters. This underscores why high liquidity is a key consideration - these popular funds rise to the top. As we continue exploring core ETF options, liquidity will help guide our coverage. The most liquid tickers allow swift trading and should be strongly considered by investors. While less liquid choices can work in certain strategies, elevated liquidity brings flexibility and stability. Look out for upcoming articles analyzing other top names on this leader board. Prioritizing liquidity steers investors towards ETFs with optimal tradability to form a resilient portfolio foundation.

DISCLAIMER: This newsletter is for educational purposes only and does not constitute financial advice.