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section header ETF fundamentals

subsection header Trading

ETFs and liquidity

It's a common misconception that an ETF's liquidity is best gauged by its average daily volume.

The reality is more complex, because the secondary market liquidity found on a stock exchange is only one source of an ETF's liquidity. It is important to consider that an ETF has an additional source of liquidity, that which is derived from its underlying portfolio of securities.


Image showing the on-screen exchange liquidity measured by the average daily volume and the underlying liquidity of the underlying market, enabled by the ETF creation and redemption process.

Source : Vanguard


Exchange liquidity

The most readily observable source of an ETF's liquidity is the on-screen trading activity of buyers and sellers in the secondary market. Average daily trading volume (ADV) is a measure of this activity, but it is only one part of an ETF's total liquidity profile.

Not all of an ETF's liquidity in the secondary market is easy to see. If you're a typical investor, your "on-screen" view is often limited to the information made available through public financial websites. This means you'll have access to the best available bid and ask for an ETF, but you won't be able to see all the quotes in an ETF's order book. These quotes are another source of ETF liquidity because they represent additional prices at which ETF units can be bought or sold.

An ETF's liquidity can be hidden in other ways too. In Canada, ETFs trade across many different marketplaces, including on, but not limited to Toronto Stock Exchange (TSX). Many data sources reflect only the trading activity that has occurred on TSX, and do not capture trading activity that has occurred on another venue. When possible, we encourage investors to make sure they have a consolidated market view, to get a more accurate picture of an ETF's liquidity and to assess the best available bid and ask in the market.


Liquidity from underlying securities

The key to ETF liquidity lies in an ETF's open-ended structure. Unlike single stocks, which have a fixed supply of shares, new ETF units can be created and existing units redeemed based on investor demand. This unique process allows ETFs to access the liquidity of their underlying securities. The result is that investors can often trade ETFs in amounts that far exceed an ETF's ADV, without significant impact to the ETF's market price.


Learn the basics of ETFs, including their history, how they compare to mutual funds, what types are available and more.


Learn about the different types of exchange-traded products, how index and active ETFs are managed and more.


Learn about strategic and tactical uses for ETFs, including asset and sub-asset allocation, portfolio completion, cash equitization and more.

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This material is for informational purposes only. This material is not intended to be relied upon as research, investment, or tax advice and is not an implied or express recommendation, offer or solicitation to buy or sell any security or to adopt any particular investment or portfolio strategy. Any views and opinions expressed do not take into account the particular investment objectives, needs, restrictions and circumstances of a specific investor and, thus, should not be used as the basis of any specific investment recommendation. Investors should consult a financial and/or tax advisor for financial and/or tax information applicable to their specific situation.

All investment funds, including those that seek to track an index are subject to risk, including the possible loss of principal. Diversification does not ensure a profit or protect against a loss in a declining market. While the Vanguard ETFs are designed to be as diversified as the original indices they seek to track and can provide greater diversification than an individual investor may achieve independently, any given ETF may not be a diversified investment.

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