Understanding ETFs: Trading and Valuation

Abstract

Examining the trading characteristics of the exchange-traded fund (ETF) product set enables investors to under-stand how growth is spreading out among a wider variety of products. Investors have learned more about the mechanisms underlying ETFs and are now able to use more of the ETF product set. Useful metrics such as implied liquidity enable investors to see potential ETF liquidity in a quantitative manner and expand the investment options in their portfolios. Moreover, understanding the nuances of executing ETFs efficiently is critical as investors move beyond the small number of ETFs that present high average daily trading volumes and utilize products with high implied liquidity but lower volumes.