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We continually hear investors frame an ETF’s liquidity in terms of it’s volume (how many shares of the ETF have traded).   The thought process usually flows simlar to the following:  “How liquid is the ETF…well it’s only traded 5,000 shares today so it’s not very liquid.”  This is not the way ETF liquidity should be viewed.

The liquidity of an ETF is driven by the underlying basket of securities that shares of the ETF represent.  The more liquid the underlying basket is, the more liquid the fund should be.  Your ability to get in or out of an ETF as close to it’s true value as possible should be your concern.  That ability has little to do with volume.

I’ll wrap up this quick thought with a quote from Alpha Architect’s interview with Chris Hempstead the head of ETF Sales for KCG: ” DO NOT let someone tell you that an ETF is illiquid simply because it doesn’t trade a lot.  You are not investing in volume.  You are investing in a product that tracks an index.  If you can efficiently buy and sell the optimal product, other people’s volume is the least of your concern.”