ETF Liquidity: Trading during volatile markets
Exchange-traded funds (ETFs) offer many benefits to investors, including flexible intraday trading, efficient market access and potentially lower costs. But one of the most important ETF features—their liquidity—is also one of the most widely misunderstood.
Dispelling the myths surrounding liquidity and ETFs
Liquidity refers to the ability to buy or sell a security quickly, easily and at a reasonable transaction cost. ETFs and individual stocks both trade on a stock exchange, leading many investors to believe that the factors that determine the liquidity of the two securities must also be similar. They’re not. ETF liquidity can often be far greater than most investors assume.
ETFs actually operate in a fundamentally different ecosystem to other instruments that trade on stock exchanges, such as individual stocks or closed-end funds. Whereas these securities have a fixed supply of shares in circulation, ETFs are open-ended investment vehicles with the ability to issue or withdraw shares on the secondary market according to investor supply and demand.
This unique creation and redemption mechanism means that ETF liquidity is much deeper and much more dynamic than stock liquidity. It also explains why an ETF‘s liquidity is predominantly determined by the liquidity of its underlying individual securities, rather than by the size of its assets or by trading volumes.
The ETF ecosystem: Trading occurs in the secondary market; creation and redemption occurs in the primary market
Investing involves risk including possible loss of principal. International investing has a greater degree of risk and increased volatility due to political and economic instability of some overseas markets. Changes in currency exchange rates in different accounting and taxation policies outside the U.S. can affect returns. Diversification does not guarantee investment returns and does not eliminate the risk of loss. Diversification among investment options and asset classes may help to reduce overall volatility. Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. Alternative investments involve greater risks than traditional investments and should not be deemed a complete investment program. They are not tax efficient and an investor should consult with his/her tax advisor prior to investing. Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain. The value of the investment may fall as well as rise and investors may get back less than they invested.
Investors should carefully consider the investment objectives and risks as well as charges and expenses of a mutual fund or ETF before investing. The summary and full prospectuses contain this and other information about the mutual fund or ETF and should be read carefully before investing. To obtain a prospectus for Exchange Traded Funds: Call 1-844-4JPM-ETF or download it from www.jpmorganfunds.com.