The liquidity of active ETFs

Son D. Pham, Ben R. Marshall, Nhut H. Nguyen and Nuttawat Visaltanachoti ()

Global Finance Journal, 2021, vol. 49, issue C

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.

Keywords: ETFs; Portfolio liquidity; Diversification (search for similar items in EconPapers)
JEL-codes: G11 G23 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:49:y:2021:i:c:s1044028320302726

DOI: 10.1016/j.gfj.2020.100572

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