As relative newcomers to the investment marketplace, some investors fear low ETF liquidity. But while providers say these fears are unjustified, they admit the market would benefit from higher volumes.
IShares Chris Sutton says there is a perception that ETFs are not liquid enough. Investors wonder – if they buy the instruments, will they be able to sell them again? But iShares, he says, are highly liquid. “Because they access the liquidity of the stocks in which they invest. Your liquidity is defined by the stocks in the ETF… I don’t think that is widely understood,” he says.
Partly to dispel this misperception, BGI has teamed up with Susquehanna International Securities, a specialist broker and market maker from New York, to increase the visibility of the liquidity in iShares. “So that if a trader looks at the terminal, they will see the bid and offer… they will see something competitive,” he says.
SSGA’s Dubois says the confusion over liquidity arises because people tend to mix up liquidity and volumes. “Exchange volume can be low from time to time, but if you compare ETFs with classic shares… with an ETF you can always create new shares,” he says. “If you get a position you can always get out of it. The only constraint to liquidity is the liquidity of the underlying index.”
Volumes of ETFs trading are, Dubois says, a little low. There are several reasons for this. The market makers who operate in the US do not do so to the same extent in Europe. The weak volumes are more perception than reality, though, he says, but SSGA aims to overcome it. “We hope to find ways to increase volumes,” he says.
While liquidity may not be a problem, some are concerned by the differences between the ETF price and the net asset value of the underlying. “ETFs may move away from the NAV – it depends on supply and demand factors,” says Ralph Frank, senior investment consultant at Mercer Investment Consulting.
ETFs, says Frank, are more of a retail investment product, where they are more cost-effective than using futures. “Investors might be getting a good deal compared to actively managed alternatives, but whether they are against other passive investments is open to question,” he says.

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