Liquid Enough: Exploring ETF Liquidity Across Asset Classes

From: Cantor ETF Group

In recent years, ETFs have offered a welcome source of liquidity for bond investors, especially in sectors like high yield where trading in ETFs far outstrips the volume in the underlying securities. Yet recently, some investors have started to question whether that liquidity advantage is sustainable, or in the words of a writer at Investment News, a “mirage” (see The ETF Liquidity Mirage), luring investors into complacency about their ability to trade in difficult markets.

In February, the Federal Reserve expressed concerns about ETF liquidity, stating that, “[f]urthermore, the growth of bond mutual funds and exchange-traded funds (ETFs) in recent years means that these funds now hold a much higher fraction of the available stock of relatively less liquid assets—such as high-yield corporate debt, bank loans, and international debt—than they did before the financial crisis. As mutual funds and ETFs may appear to offer greater liquidity than the markets in which they transact, their growth heightens the potential for a forced sale in the underlying markets if some event were to trigger large volumes of redemptions.”

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