Factors Affecting Liquidity Mix
Exchange traded funds (ETFs) are believed among most liquid trading instruments, especially when compared against mutual funds. But different ETFs have different levels of liquidity. Below are some factors that affect the liquidity of these funds.
1. Underlying Asset: Exchange traded funds which have less liquid equities as there underlying assets are generally less liquid than those have liquid equities as underlying asset.
2. Diversification: Exchange traded funds which invest in broad diversified market indexes are generally more liquid than which invest in specific sectors.
3. Market Capitalization: Exchange traded funds which invest in large-cap stocks are generally more liquid than mid-cap and small-cap tracking Exchange traded funds .
4. Fixed Income Securities: Exchange traded funds which have fixed income securities like treasury bonds, corporate bonds, etc as underlying instruments are more volatile and is also less risky.
5. Economy: Exchange traded funds which track indexes of emerging world economies are generally considered less liquid than that of developed world economies. Also ETFs investing in domestic securities are more liquid than foreign ones.
6. Trade Volume: Although not a major factor, increase in trading volume of ETF positively contributes to the liquidity of it.
7. Trading volume of underlying stocks: The more the underlying stocks are traded the higher the liquidity of Exchange traded funds .
8. Time, News and Market Forces: These ever changing factors affect the liquidity of all the traded instruments including Exchange traded funds .
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