November 2, 2026 | News
Global Head of Product Strategy and Development
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Low trading volume doesn’t necessarily mean low liquidity. That’s an important distinction for ETFs, particularly those that are newly launched. Volume naturally starts small while a fund builds its shareholder base. Liquidity, on the other hand, can be available from the first day of trading due to the securities an ETF holds.
The key is understanding that an ETF’s liquidity extends beyond what investors can see on a trading screen. For advisors, it can be thought of in three levels:
Together, these levels help explain why an ETF may accommodate trades far larger than its reported daily volume.
Source: William Blair, as of October 2026.
For individual stocks, ADV can be a useful indicator of liquidity. But ETFs are built differently. Unlike individual stocks, ETFs can create and redeem shares in response to investor demand, making their trading volume a less reliable indicator of how easily they can be bought or sold.
A company’s stock has a relatively fixed number of shares outstanding. If buyers want more shares than sellers are offering, the price must rise until enough sellers emerge. That’s why ADV can be a meaningful liquidity measure for a stock: It provides an indication of how actively shares typically change hands.
ETFs, by contrast, can create new shares when demand rises and redeem existing shares when demand falls. This flexibility means an ETF’s ability to accommodate trades isn’t limited to the shares already circulating in the market. Its trading history is a record of past activity, not necessarily a ceiling on future trading capacity.
An ETF’s liquidity isn’t limited to the shares already circulating in the market.
To understand how this works, it helps to look at the two markets that provide ETF liquidity.
The first is the secondary market, where investors buy and sell existing ETF shares through their brokers. This is the market most investors see, and its activity is reflected in ADV and the bid and ask prices displayed on screen.
The second is the primary market, where ETF shares are created and redeemed. Authorized participants, typically large broker-dealers, can exchange baskets of underlying securities (or cash) with the fund for new ETF shares, or return ETF shares in exchange for securities (or cash). This creation/redemption mechanism gives market makers access to a potential source of liquidity beyond the ETF shares already trading on the exchange, allowing them to facilitate transactions larger than the volume or share quantities displayed on-screen might suggest.
Consider an advisor who wants to buy 50,000 shares of an ETF that typically trades just 5,000 shares a day. Despite the relatively low trading volume, the advisor may be able to execute the order efficiently because the liquidity of the underlying holdings allows an authorized participant (AP) to exchange a basket of those securities for additional shares of the ETF beyond the reported trading volume. One way this can happen is illustrated below.
Source: William Blair, as of October 2026.
The process can also work in reverse for a large sale. The important point is that ETF liquidity providers aren’t limited to the shares already changing hands on the exchange. They can draw on the underlying markets to facilitate larger trades, with execution prices reflecting the value and trading costs of the securities the ETF holds.
The number of shares shown at the bid or ask reflects what market makers are currently quoting, not what they can accommodate.
Understanding where an ETF’s liquidity comes from is only part of the equation. How an order is placed can affect execution costs. A few practical considerations can help advisors trade more efficiently, particularly when dealing with newer or less actively traded ETFs.
William Blair’s active ETFs provide access to international equities, emerging markets equities, and emerging markets fixed income—asset classes in which our investment teams have decades of experience.
Although these ETFs are new, the markets in which they invest are well established. Their ability to accommodate trades depends not simply on how many ETF shares change hands each day, but also on the liquidity of their underlying holdings and prevailing market conditions.
For advisors, the takeaway is straightforward: a new ETF’s limited trading history isn’t necessarily a barrier to taking a meaningful position. Looking beyond trading volume—and understanding how to access the liquidity of the underlying holdings—can help advisors evaluate and trade new ETFs with greater confidence.
Jay Lisowski, CFA, is the global head of product strategy and development at William Blair.
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