Liquidity
Liquidity describes how easily an investment can be bought or sold without significantly moving its price. Highly liquid assets can be traded quickly and cheaply; illiquid assets can be slow or costly to trade.
Why it matters
- Highly liquid ETFs and stocks tend to have narrower bid-ask spreads and lower trading costs.
- Illiquid investments can be difficult to sell quickly, especially during market stress.
- An ETF's underlying holdings' liquidity matters more than the ETF's own trading volume, since new shares can be created or redeemed.
Simple example
- A large-cap S&P 500 ETF is typically highly liquid, with tight spreads and heavy daily trading volume.
- A real estate property or a thinly traded micro-cap stock is comparatively illiquid — it can take time to sell at a fair price.