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Debunking 3 myths about ETF liquidity

We took a look at three common misconceptions that can contribute to increased costs. Explore each of them to find out how to avoid these costly mistakes.

2 min read

Myth: ETFs with the lowest expense ratios have the lowest total costs

Fact: Look beyond the expense ratio. An ETF's expense ratio and trading costs are not correlated—so a low-fee fund may not have the lowest total cost of ownership (TCO).

To calculate an ETF's cost, a combination of technical and strategy-specific factors come into play:

  • Bid-ask spreads
  • Rebalance frequency
  • Rebalance size

Discover how to analyze the true costs of owning an ETF before you make your next trading decision.

Myth: A single metric is all you need to gauge an ETF’s liquidity

Fact: Get the complete liquidity picture. Investors often use point-in-time statistics like 30- or 90-day average trading volume to analyze an ETF's liquidity.

But a fund's liquidity profile can change in different markets. Your ETF due diligence should:

  • Look beyond on-screen liquidity
  • Analyze bid-ask spreads over various time periods, times of day, and market environments
  • Evaluate the fund's profile, from daily trading volume to assets under management

Navigate the twists and turns of an ETF's liquidity dynamics by identifying the most liquid and cost-effective ETFs.

Myth: All ETF trade execution is the same

Fact: Choose the right execution strategy. In fact, ETF investors can choose from a variety of execution strategies to control costs. Because ETFs trade on an exchange with primary and secondary market liquidity, you have the flexibility to choose:

  • Order type, such as market or limit
  • Order execution, with help from institutional trading desks or authorized participants

Master the mechanics of ETF trading so you can execute your trades with more confidence.

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