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May 15, 2024

Demystifying the Liquidity of ETFs

Liquidity is an important characteristic to consider when aligning security selection with investment objective. The need for capital protection and ability to convert an investment holding to cash is essential for shorter or unpredictable time horizons, but it is less important when investing for a retirement goal 30 years out. Investors may often evaluate a stock’s liquidity by its trading volume.  While this may be a starting point when looking at a common stock, it’s less effective when evaluating exchange-traded funds (ETFs), as it fails to take into account the structure behind the ETF that ensures its liquidity. The result is often a misunderstanding of an ETF’s liquidity and one of the most persistent myths in our industry.

For any security trading on the stock market, the price is simply the auction price agreed upon by the buyer and the seller. An investor looking to make a sizeable investment in a single thinly traded security would be justified in their concern of potentially moving the market, driving the price higher and resulting in a poor outcome. However, daily trading volume only provides a small indication of an ETF’s liquidity. Unlike a single stock, the supply of an ETF is open-ended; new ETF shares can be created and existing shares can be redeemed on demand. This structure not only maintains the pricing integrity and ensures trading takes place around the net asset value (NAV), it also provides a structure for liquidity. Thus, the liquidity of an ETF is much more than its daily trading volume.

The liquidity of an ETF is more accurately determined by evaluating the liquidity of its underlying holdings. Whereas daily ETF trading volumes reflect the trading activity of the security on the secondary market, the liquidity of the underlying securities may indicate how effective the ETF sponsor and market makers will be in the primary market when absorbing flows into an ETF.  This can sometimes be referred to as implied liquidity.

Implied liquidity is an indication of the liquidity of an ETF as a function of its holdings, rather than trading volume.  When an ETF is bought or sold, the buyer and seller are essentially trading a basket of the securities that make up a unit of that ETF product. As the basket must contain every security within the ETF, it can only be as liquid as its least liquid security. In other words, implied liquidity is an estimate of how much assets an ETF could absorb based on the liquidity of its underlying holdings, without having a bigger price impact on those securities.



Single Stock


Based on the value of the underlying portfolio (NAV)

Based on supply/demand of the stock

Supply of shares



Primary source of liquidity

Trading activity of the underlying securities

Trading activity of the stock

Best measure of liquidity

Implied liquidity or daily trading volume of the underlying securities

Daily traded volume of the stock

The rise in popularity of ETFs is partly due to the added liquidity and transparency they offer over traditional mutual funds. Investors still gain the benefits of diversification while benefitting from the ability for intraday trading on the open market. The Canadian ETF industry has grown significantly, with assets under management (AUM) surpassing $400 billion and approaching the $422 billion mark.1 This proliferation of ETF sponsors and products will undoubtedly result in some ETFs having a lower daily trading volume. To help investors avoid missing out on opportunities that may best serve their investment goals, it is more important than ever to fully understand the liquidity function of the ETF creation and redemption process.

Greater awareness around the processes that provide liquidity, and how to best trade ETFs and effectively navigate spreads will only increase adoption and help to continue to demystify the investment solution. As investors’ needs continue to become increasingly complex, education to simplify the products available and enhance the understanding of Canadian investors is to everyone’s advantage.

As at May 15, 2024.

About the Author

Randall Alberts

Randall Alberts

Blog author
CI Global Asset Management

As Senior Vice-President and Head of Distribution Eastern Canada, Randall works within the sales leadership group to design and execute CI Global Asset Management’s distribution strategy across all products and platforms. Randall leads the Eastern Canada sales team in supporting financial advisors and collaborating with strategic partners. A strong believer in the value of financial advice, he takes pride in helping advisors successfully navigate the challenges and complexities of modern asset management. Randall served as a Head of Distribution for WisdomTree Asset Management Canada, Inc. up until its acquisition by CI in February 2020. He brings extensive experience in the global asset management and wealth management industry having held senior sales positions and leadership roles at both BMO Global Asset Management and RBC. Having started his career as a financial advisor in 1995, first in a mutual fund dealership and later at a large IIROC brokerage, Randall brings a unique perspective and over 25 years experience in the financial services industry. Randall holds a Master of Business Administration (MBA) and a Chartered Investment Manager (CIM) designation.


Commissions, management fees and expenses all may be associated with an investment in exchange-traded funds (ETFs). You will usually pay brokerage fees to your dealer if you purchase or sell units of an ETF on recognized Canadian exchanges. If the units are purchased or sold on these Canadian exchanges, investors may pay more than the current net asset value when buying units of the ETF and may receive less than the current net asset value when selling them. Please read the prospectus before investing. Important information about an exchange-traded fund is contained in its prospectus. The indicated rates of return are the historical annual compounded total returns net of fees and expenses payable by the fund (except for figures of one year or less, which are simple total returns) including changes in security value and reinvestment of all dividends/distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. ETFs are not guaranteed; their values change frequently, and past performance may not be repeated.

This document is provided as a general source of information and should not be considered personal, legal, accounting, tax or investment advice, or construed as an endorsement or recommendation of any entity or security discussed. Every effort has been made to ensure that the material contained in this document is accurate at the time of publication.  Market conditions may change which may impact the information contained in this document. All charts and illustrations in this document are for illustrative purposes only. They are not intended to predict or project investment results. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies.

Certain statements contained in this communication are based in whole or in part on information provided by third parties and CI Global Asset Management has taken reasonable steps to ensure their accuracy. Market conditions may change which may impact the information contained in this document.