Facts vs Fiction: Five myths of ETF liquidity and trading

This is why mutual funds, the older sibling of ETFs, don’t report volume. Volume does exist for mutual funds, but investors don’t tend to look for this data as it doesn’t make sense as a measure. The key is to look at the underlying assets within the ETF. Each ETF holds a basket of underlying securities, and those underlying securities define how much volume or value can trade in the ETF.

Myth #2 – It Doesn’t Matter When You Trade an ETF.

The time of day you trade an ETF can matter. Typically, investors will be able to extract better liquidity and stronger pricing when markets are open – but this is somewhat dependent on the type of ETF you hold. If you’re seeking to trade a well-diversified basket of European equities, you may be able to do so at any time of day with very little impact on your pricing. But if you were to trade a concentrated basket of something that is actively managed and that holds international components, European or other, trading when the exchange is closed will likely impact the pricing that you could achieve.

A common example of this is often seen when trading bond ETFs when the bond market is closed. If the underlying market is closed, you may have difficulty trying to fill your order. And the larger the order, the more challenging it is to fill.  So, in many cases, the time at which you trade does matter.

Myth # 3 – The Bid-Offer Spreads Are Too Large.