Today I want to address a recurring question readers raise: how liquid are exchange-traded funds (ETFs)? More specifically, many investors worry when an ETF appears to trade only a small number of shares each day.
A recent conversation with a friend brought this up again. I had suggested the BMO S&P/TSX 60 Index ETF (ZIU) as a lower-cost alternative to the long-established iShares S&P/TSX 60 Index ETF (XIU). ZIU charges a 0.15% management expense ratio (MER) versus XIU’s 0.18%, so at first glance ZIU seemed like a clear cost-saving choice.
But my friend pointed to trading volume. On February 17, 2026, minutes before the market closed, ZIU had traded roughly 2,700 units that day, while XIU had traded over 3 million shares. That stark contrast can make XIU look much more liquid.
It’s true that illiquidity can be a real concern: thinly traded ETFs can produce awkward executions, and large market orders may fill at poor prices. Yet daily trading volume alone does not determine an ETF’s true liquidity. That’s a common misconception. ETFs are structured differently from individual stocks, and their liquidity often extends beyond what appears on the screen.
Below I explain how ETF liquidity really works, what matters when you place a trade, and when low visible volume should genuinely worry you.
What actually determines ETF liquidity?
It’s easy to assume that, like stocks, an ETF’s liquidity is defined by its daily trading volume. For most individual equities, higher volume means tighter spreads and easier execution. With ETFs, however, trading volume is only part of the story. The primary determinant is how liquid the ETF’s underlying holdings are.
When you buy or sell an ETF on an exchange, you transact at the market price. The fund’s true value is measured by its net asset value (NAV): the total value of assets minus liabilities, divided by outstanding shares. Market price and NAV can diverge briefly in the form of small premiums or discounts.
What keeps market price and NAV aligned is the creation and redemption mechanism, typically executed in-kind. Specialized firms known as authorized participants (APs) work with ETF issuers to create or redeem shares. While market makers post bids and offers on an exchange, APs operate in the primary market by exchanging baskets of securities for ETF units and vice versa. Their role is structural: they enforce the link between the ETF’s market price and its NAV.
If an ETF trades above its NAV, APs can buy the underlying securities, deliver them to the issuer, and receive newly issued ETF units to sell on the market. That additional supply pushes the ETF price back toward NAV. Conversely, if the ETF trades below NAV, APs can buy ETF units in the market, redeem them for the underlying securities, and sell those securities, which reduces supply and lifts price toward NAV.
So ETF liquidity ultimately depends on how readily APs can assemble or dismantle the underlying basket. If the constituent securities are highly liquid—think large-cap stocks in major indices—creation and redemption are efficient, and the ETF remains liquid even if its visible trading volume is low. If the ETF holds illiquid or hard-to-access assets, the process becomes more complex and costlier, and liquidity becomes a legitimate concern.
How do I know if an ETF is liquid?
Since visible volume can be misleading, how should a retail investor assess ETF liquidity without digging into institutional plumbing? The practical answer is to examine what the ETF actually owns. Liquidity flows from the underlying basket.
Large-cap stocks trading on major exchanges—New York Stock Exchange, NASDAQ, Toronto Stock Exchange—typically provide deep, active markets. ETFs that track broad benchmarks such as the S&P 500, NASDAQ 100, or S&P/TSX 60 usually face no structural liquidity issues because the components are easy for APs to trade.
Moving down the market-cap spectrum, or into smaller, less-followed international markets, liquidity can thin. Emerging market stocks and certain foreign listings may be harder for APs or market makers to access, increasing the potential for wider spreads and more volatile premiums or discounts.
Bond ETFs are more nuanced. Government bonds in Canada or the United States are very liquid in institutional markets, but they trade over-the-counter, so pricing is dealer-based rather than centralized. Corporate bonds vary by credit quality: investment-grade issues are generally more liquid than high-yield bonds, and specialized credit instruments can be much less liquid.
In short, if the underlying securities trade actively and in large volumes, the ETF built on them is likely to remain liquid, regardless of the ETF’s own headline trading volume.
The potential hazards of owning an illiquid ETF
If an ETF is less liquid, the primary consequence for most investors is a wider bid-ask spread. The bid is the highest price buyers are willing to pay; the ask is the lowest price sellers will accept. The difference—the spread—is an implicit transaction cost separate from the MER. When you buy, you typically pay near the ask; when you sell, you receive near the bid. A wide spread increases your cost to enter and exit a position.
For buy-and-hold investors who trade infrequently, a modestly wider spread may be a minor concern relative to long-term returns. For active traders or those making large transactions, consistent wide spreads can significantly erode performance and should be treated as a real ownership cost.
Returning to the earlier comparison: on February 17, nine minutes before market close, XIU quoted a bid of $48.38 and an ask of $48.39—a one-cent spread, about 0.02% of price. ZIU, despite much lower daily share turnover, showed a bid of $73.68 and an ask of $73.72—a four-cent spread, roughly 0.05%. Both spreads are narrow in absolute terms. The reason is simple: both ETFs hold the same highly liquid Canadian large-cap stocks, and APs can readily create or redeem shares, keeping spreads tight.
By contrast, a specialized ETF holding a large number of mainland Chinese A-shares, for example, may show noticeably wider spreads because those underlying securities trade with less depth and are harder for foreign investors to access. In those cases, creation and redemption are more complex and market makers price that risk into wider spreads.
The practical takeaway: don’t judge ETF liquidity by volume alone. Focus on the underlying holdings and check the spread. If spreads are consistently wide in normal market conditions, factor that cost into your decision. If spreads are narrow, small visible trading volume is often not a meaningful barrier to efficient execution.
Read more about investing with ETFs:
- Why Vanguard’s ETF aimed at retirees is currently cautious in its asset allocation
- How often should you rebalance?
- The MoneySense ETF Screener
- Can you hedge against a market crash with ETFs?