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The liquidity of active ETFs

Author

Listed:
  • Pham, Son D.
  • Marshall, Ben R.
  • Nguyen, Nhut H.
  • Visaltanachoti, Nuttawat

Abstract

Active exchange traded funds (ETFs) are less liquid than their underlying portfolios. We attribute this finding, which contrasts with that for passive ETFs, to uncertainty about the future holdings of active ETFs. In addition, while diversification generally reduces firm-specific information asymmetry and improves portfolio liquidity, it impairs the liquidity of active ETFs, consistently with the substitution effect between diversification and liquidity documented in the literature. We show that the gap between active ETF and underlying liquidity varies cross-sectionally and over time and can be explained by differences in size and volume between ETFs and their underlying portfolio, by ETF age, and by ETF pricing errors.

Suggested Citation

  • Pham, Son D. & Marshall, Ben R. & Nguyen, Nhut H. & Visaltanachoti, Nuttawat, 2021. "The liquidity of active ETFs," Global Finance Journal, Elsevier, vol. 49(C).
    • Handle: RePEc:eee:glofin:v:49:y:2021:i:c:s1044028320302726
    DOI: 10.1016/j.gfj.2020.100572
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    More about this item

    Keywords

    ETFs; Portfolio liquidity; Diversification;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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