Advisers don't have a firm grasp of ETF liquidity, Cerulli finds

There's shares and underlying shares and therin lies the confusion.

Jul 18, 2013 @ 3:27 pm

By Jason Kephart

The ability to get in and out of markets quickly has always been one of the most attractive features of exchange-traded funds, but it turns out it may be the feature advisers understand the least.

ETF liquidity was ranked as the subject advisers are least knowledgeable of in a recent survey of ETF companies done by global research firm Cerulli Associates Inc. Almost two-thirds of ETF companies ranked the lack of understanding around how liquidity works as a major challenge to the continued growth of ETFs.

“There is a misconception that you can just look at the trading volume of an ETF,” said Alec Papazian, associate director at Cerulli.

Trading volume is actually only part of the ETF liquidity puzzle, though.

“The confusion comes from the fact that ETFs have two layers of liquidity,” said Sue Thompson, head of the RIA group at BlackRock Inc., the parent company of iShares, the world's largest ETF firm. “With stocks or mutual funds there's only one layer of liquidity.”

On one hand, there's the ETF's primary liquidity, which is based on its underlying assets. An ETF that invests in U.S. large-cap stocks is going to tend to be very liquid, no matter its trading volume, because of the high liquidity of U.S. large-cap stocks. ETFs that invest in less liquid securities like municipal bonds or emerging markets small-cap stocks, are going to be less liquid because the underlying securities are less liquid.

However — and this is where it gets a little tricky — the shares of ETFs that invest in less liquid securities can trade much more often than their underlying securities.

“The beauty of the ETF is it took something that was illiquid and made it far more liquid,” Ms. Thompson said.

The ability to trade ETF shares more often than the underlying securities can lead to the share price deviating from the net asset value. That can lead to a premium if there's a lot of buying or a discount if there's a lot of selling. Premiums and discounts tend to only pop up during extreme times of buying and selling and generally even out over time.

Getting advisers comfortable with how ETF liquidity works is a high priority for ETF companies because there's still a lot of room for the products to grow.

BlackRock estimates just 6% of adviser portfolios are allocated to ETFs. Overall, 29% of assets are in passively managed funds, according to Cerulli.

Wirehouses and registered investment advisers are the two heaviest users of ETFs, with 63% and 55% of advisers in those channels using ETFs, respectively, according to Cerulli. Independent broker-dealers and regional advisers are the least likely to use ETFs, with just 39% and 42%, respectively, currently using ETFs.


What do you think?

View comments

Recommended for you

Featured video


Where in the U.S. are RIAs growing the fastest?

InvestmentNews' deputy editor Robert Hordt talks to senior columnist Jeff Benjamin about his report on how registered investment advisers are faring in different regions of the country.

Latest news & opinion

Regional broker-dealers quietly making comeback now, but the future remains uncertain

After a period of decline, the regional brokerage industry is scoring recruiting gains at the expense of wirehouses.

With stock market in a correction, is a recession just ahead?

Some say the market is overreacting to bad news — but what if it's not?

10 tips for hiring top young advisers

Hiring is not easy and retaining good employees can be even more difficult. Here's a roadmap for bringing on new advisers and training them — and even firing them, if necessary.

Kestra Financial latest broker-dealer to be put up for sale

The independent B-D's owner, Stone Point Capital, has tapped Goldman Sachs to lead the deal.

Wells Fargo Advisors 2019 comp plan sees little change

But lowest-producing advisers face a pinch in pay.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print