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Behind the Mechanics of ETF Trading, Liquidity

This article was originally published on ETFTrends.com.

ETFs have become a household name as more investors adopt a tax-efficient investment tool to access niche and broad market exposures. However, many investors only have a cursory knowledge in how the relatively new investment vehicle actually works.

On the upcoming webcast, Mechanics of ETF Trading and Liquidity, Matt Lewis, Vice President and Head of ETF Implementation and Capital Markets, at American Century Investments, and Sandra Testani, Director of Product Management for Alternatives and ETFs at American Century Investments, will take an in-depth look into exchange traded funds and consider approaches to achieve the best possible execution and an overall positive trading experience.

American Century was among the latest group of money managers that turned into ETF providers. American Century Investments branched away from its six-decade history of managing traditional open-end mutual funds after launching the American Century STOXX U.S. Quality Value ETF (VALQ) and American Century Diversified Corporate Bond ETF (KORP) .

As investors consider the time-tested American Century strategies behind these new ETFs, some may be concerned about the low trading activity with the funds. However, with ETFs, the day-to-day trading liquidity is not the indicative indicator for an ETF's true liquidity.

When it comes to interpreting an ETF’s true liquidity, it is important for investors to look below the surface. Some suggest that new ETFs always carry elevated risks based solely on lower average daily trading volume, but that is not true. Newly issued ETFs can come with with deep liquidity, much of it unseen on a trading screen. Investors just have to take the time to look behind the curtains, so to speak.

An ETF’s true liquidity is more related to he liquidity of the underlying basket of securities. If an ETF exhibits low average volume, it does not mean that it is difficult to trade. Due to its innate creation and redemption process, ETFs are able to create and redeem shares based on supply and demand through the help of Authorized Participants whom work with ETF issuers and market participants to help provide more efficient or seamless ETF trades.

By working with a brokerage desk or an ETF provider's capital markets team, investors looking into ETFs with low trading volumes may be able to capture efficient trades without negatively affecting the trade price.

Financial advisors who are interested in learning more about trading ETFs can register for the upcoming Tuesday, August 28 webcast here.