There's More to ETF Liquidity Than Meets the Eye
Exchange-traded funds' unique structure provides two sources of liquidity.
One of the most challenging concepts for those who are new to exchange-traded funds to grasp is the multifaceted nature of their true liquidity. ETFs are open-end funds, which regularly "create" and "destroy" shares in response to changing supply and demand dynamics. As such, they have two distinct sources of liquidity: primary markets, where shares are created and destroyed, and secondary markets, where they are quoted and traded in much the same way as stocks.
When transacting in traditional mutual funds, investors typically deal directly with the fund company. When investors put new money into the fund, the portfolio manager will put it to work by purchasing securities. Likewise, if there are net redemptions, the manager will sell securities to meet those requests, or tap into the fund's cash holdings. The key point is that the fund itself must access the capital markets in managing the portfolio. Also, all investors, whether they are buying or selling fund shares, will receive an amount equivalent to the end-of-day net asset value, regardless of the time of the day that their order was placed.
John Gabriel does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.