Identifying Illiquid ETFs: What Investors Must Know Many investors mistakenly believe that low trading volume automatically signals an illiquid ETF, but the reality is far more nuanced. True liquidity depends on several interconnected factors that go beyond simple volume metrics. Understanding these distinctions can help protect your portfolio from costly trading mistakes and hidden expenses. The primary misconception stems from confusing secondary market trading volume with actual fund liquidity. An ETF might have modest daily trading activity yet still maintain excellent liquidity due to the underlying securities it holds. Conversely, an ETF with impressive trading volume could face significant liquidity challenges if its portfolio contains difficult-to-trade assets.
