Active ETF Liquidity
60 Pages Posted: 8 May 2019 Last revised: 27 Mar 2020
Date Written: March 27, 2020
Active ETFs are less liquid than their underlying portfolios. This finding, which contrasts with that for passive ETFs, is attributed to uncertainty of future holdings of active ETFs. In addition, while diversification generally reduces firm-specific information asymmetry and improves portfolio liquidity, the liquidity of active ETFs is adversely affected by diversification, consistent with the substitution effect between diversification and liquidity documented in the literature. Furthermore, we show 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, ETF age, and ETF pricing errors.
Keywords: ETFs; Portfolio Liquidity; Diversification
JEL Classification: G11; G23
Suggested Citation: Suggested Citation