ETF Overview

Liquidity and ETFs

Liquidity is an important consideration when it comes to investing. When investors want to buy or sell a particular security, having enough liquidity means they can trade promptly and at a price that falls within their expectations. When a security is “illiquid,” there is an insufficient number of willing buyers or sellers, which means the security cannot be traded quickly at a price that accurately reflects current market valuations. In this situation, investors may have to wait longer before trading or adjust the price at which they are willing to buy or sell in order to attract another investor.

So, how do exchange traded funds (ETFs) provide liquidity?

Let’s look at two key processes:

The ETF creation process ensures there is enough supply for investors looking to make a purchase. If demand exceeds supply for a particular ETF, then a “market maker” (i.e., an intermediary who facilitates trading) approaches the ETF provider (i.e., the firm that designs the ETF), who will go into the market to buy more of the individual securities that the ETF holds, and issue additional ETF units. Now that supply of this ETF has been increased, investors can make their purchase.

The Liquidity Process

The ETF redemption process is the reverse of the ETF creation process. If there is more supply than demand for a particular ETF, the market maker approaches the ETF provider, who will take the individual securities within an ETF and sell them back into the market. The investor can then sell the ETF in a timely manner and without having to accept a far lower price in order to make their trade.

As a result of these two unique processes, the ETF market ensures supply is always in line with demand. The process is efficient, straightforward and executed automatically behind the scenes, making it simple and convenient for investors who are buying or selling ETFs.

View our video on liquidity to learn more about this topic as well as the creation and redemption process.


Important information about each First Asset ETF Fund is contained in its respective prospectus. Individuals should seek the advice of professionals, as appropriate, prior to investing. This investment may not be suitable for all investors. Some conditions apply. Copies of the prospectus may be obtained from your investment advisor, First Asset or at www.sedar.com. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. ETFs are not guaranteed, their values change frequently and past performance may not be repeated.

The commentaries presented are prepared as a general source of information. They are not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting or tax. The opinions contained in this document are solely those of First Asset and are subject to change without notice. First Asset assumes no responsibility for any losses or damages, whether direct or indirect, which arise from the use of this information and expressly disclaims liability for any errors or omissions in this information. First Asset is under no obligation to update the information contained herein.