Trading in an instant, a tap on a screen. One of the biggest appeals of using an ETF is the idea of its liquidity. But is your ETF as liquid as you think?
Often investors use the average trading volume as a measure of liquidity, but this might not be giving an accurate picture of how liquid an ETF really is and what might actually happen if there is a market crunch.
That isn’t to say that the average trading volume isn’t useful – it is! But you should be looking deeper to actually understand how liquid your selected ETF is.
The average trading volume of an ETF is a measure of the number of ETF units being traded in a given period. It effectively tells you how popular a listed option is – higher volumes are more popular, lower volumes are less popular.
When it comes to equities, this is a helpful measure of liquidity because it gives investors an indication of how easily they can trade their shares. For example, micro-cap companies might go days or weeks without trades and it is harder for investors to sell them, while companies like BHP and Commonwealth Bank are heavily traded on a daily basis and therefore more liquid.
There are a set number of shares available in a listed company – the ability to sell depends on there being interested buyers.
It isn’t an accurate measure of ETF liquidity because ETFs are built differently – they are open-ended funds and can be expanded to offer more units to interested buyers or contracted to buy back units from investors wishing to sell.
Market makers have an arrangement with the ETF issuer to create liquidity – they’ll buy or sell the units from investors selling to allow for this and set the pricing for the units. If there is higher demand, they’ll simply create more units with the ETF issuer to meet that demand – or redeem units should more investors be selling than buying.
Based on size and average trades, the most popular ETF listed on Australian exchanges is the Vanguard Australian Shares Index ETF (ASX:VAS) which has an average 3-month trading volume of 530,457 units.
But this doesn’t mean it is more liquid than an ETF with a lower trading volume (but similar underlying holdings) like the Global X Australia 300 ETF (ASX: 300).
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Generally speaking, ETFs should have daily liquidity because of their structure.
It can also be useful to consider the underlying holdings to understand the true liquidity of an ETF and what that might mean in a market crunch.
If you consider the basics, cash, bonds and shares are typically more liquid compared to investments like infrastructure or collectibles (think art or vintage cars) where it can take more time to find a buyer.
In the case of the fund examples mentioned earlier, both invest in the 300 largest companies listed in Australia – they use different indices but the holdings would be largely the same. These companies are typically highly traded and therefore highly liquid so both ETFs would have similar liquidity in their underlying assets.
By contrast, an ETF with emerging market equities would have less underlying liquidity in the assets because emerging market equities are not traded at the same volume.
When the liquidity of underlying holdings can be an issue is during market volatility or crunches and you might see a temporary trading halt. For example, there were several trading halts in US ETFs during the Global Financial Crisis. Trading halts can be more common in ETFs with more complicated structures such as leveraging, and those that target volatility or a significant theme.
A recent example in the US was a trading halt for the Defiance Daily 2X Space ETF (BATS: SPCL) on 12 June 2026 due to volatility from the SpaceX IPO that day (the IPO hit record volumes).
In Australia, a standard halt lasts a maximum of two full trading days and can be a result of portfolio data issues, market events or to block aggressive trading orders.
Another measure that can be useful to consider is the bid-ask spread. If there is a big difference between the price someone will pay for units, compared to what they can get for selling the units, this suggests some difficulties in selling – such as higher transaction costs or problems in executing sales. A closer spread is better.
Look for consistency in the bid-ask spread and that pricing is in line with the underlying holdings in the portfolio.
If you are concerned about the true liquidity of your ETF, it’s worth thinking back to a few things.
Firstly, the open-ended structure of an ETF using market makers is designed to provide daily market liquidity.
Secondly, the true liquidity comes down to the underlying holdings – big listed companies are more liquid than micro-caps for example, bonds are more liquid than real estate or collectibles, and so on.
The trading volume can tell you about the popularity of an ETF, but don’t be put off by a lower trading volume if the ETF fits your portfolio – remember it can still be just as liquid as the higher traded option.
Vanguard Australian Shares Index ETF seeks to track the return of the S&P/ASX 300 Index before taking into account fees, expenses and tax.
Invest in the largest 300 Australian companies listed on the ASX.
Disclaimer: This article is prepared by Sara Allen. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.
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