Implied Liquidity Definition
Learn the definition of implied liquidity and other ETF terminology from the etf.com glossary.
Learn more about Implied Liquidity
Implied liquidity is a measure of the potential trading volume of an ETF based on the liquidity of its underlying assets. It is a forward-looking metric that indicates the ability to trade a significant amount of ETF shares without significantly impacting the market price. Implied liquidity is calculated by extrapolating the trading volume of the underlying assets into ETF terms. This involves considering the ETF's creation unit size, which represents the number of ETF shares that can be created or redeemed by exchanging a basket of underlying securities. Implied liquidity is particularly useful for evaluating the liquidity of ETFs that track less liquid underlying assets. It provides investors with a more comprehensive assessment of the ETF's tradability compared to relying solely on average daily volume (ADV), which reflects historical trading activity. A higher implied liquidity suggests that the ETF can be traded in larger quantities without substantially affecting the market price, making it a more liquid investment vehicle. Conversely, lower implied liquidity indicates that large trades may have a more significant impact on the ETF's price, potentially increasing transaction costs and execution risks.
Related Terms
Liquidity, Trading Volume, Creation and Redemption Mechanism, Average Daily Volume (ADV)