December 14, 2022

What to Consider When Weighing ETF Liquidity in Volatile Markets

2 min read

In a year marked by a bruising bear market, large price swings, soaring inflation and hawkish Fed policy, asset liquidity has become a prized trait in portfolios. Liquidity is down substantially across stock and bond markets, amplifying price swings and making conditions more challenging.1

Exchange-traded funds (ETFs) have historically provided benefits including transparency, low fees and tax efficiency. In 2022, ETF trading volume continued its almost decade-long streak of steady growth—thanks in part to ETFs’ liquidity—with many ETFs acting as a relief valve for liquidity squeezes in underlying markets and securities.

Once popular mainly for their broad equity market exposure, ETFs now span asset classes: since 2020, fixed-income, commodity and diversified actively managed ETFs have led the way in growth.2 As more investors consider taking advantage of the benefits of ETFs, a few important aspects are worth a closer look while trading.

  • Not every ETF has the same liquidity. An ETF is at least as liquid as its underlying holdings in almost every case, because of the creation and redemption process. Authorized participants, who provide much of the liquidity in an ETF, have access to the primary market when large trades are placed, but the liquidity of the underlying primary market varies depending on the available asset class or securities.
  • It’s important to get a full picture of costs. In volatile markets, there’s often more buying and selling within ETFs. The transaction costs an investor faces depend on the specific type of ETF, the robustness of trading and the brokerage platform. Costs can be impacted by a variety of factors, including platform trading fees or commissions, ETF expense ratios and bid/ask spreads. Always monitor ETF fees and trading-platform charges for transactions.
  • Bid/ask spreads typically widen in more volatile markets. Total ETF trading volume has risen every year since 2019, and is on pace to continue the trend in 2022. Bid/ask spreads typically increase when there’s higher volatility—as measured by the CBOE Volatility Index (or VIX), a common index also known as the “fear gauge.” The greater the volatility, the wider the trading spread, which should always be a consideration when trading ETFs.
  • A limit order prioritizes price over speed. When bid/ask spreads in ETFs widen as a result of volatility, it may make sense to place a limit order instead of a market order. Unexpected price swings can happen on days with high trading volume or when unexpected news impacts markets. Limit orders allow an investor to target a specific price, and may provide protection from surprise ETF unit price movements.
  • Weigh all relevant factors. While the liquidity benefits of ETFs may be attractive to many investors, always consider a wide variety of variables when placing ETF trades. It’s important to think about factors such as market impact, urgency of trade execution, risk tolerance and the desire for anonymity.
  • How AB can help. The AB Ultra Short Income ETF and AB Tax-Aware Short Duration Municipal ETF may provide avenues to enhance the liquidity of taxable and nontaxable fixed-income portfolio allocations. Directed by tenured AB portfolio management teams, both funds focus on yield, price stability and providing liquidity through sophisticated actively managed strategies.

Ultimately, understanding the ETF trading ecosystem and sources of liquidity may help investors execute trades more effectively. Depending on factors such as urgency, time frame, asset class and current trading volume, investors may be able to benefit from ETFs regardless of where market volatility is headed from here.

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Get periodic insights, tools and access to events from AB’s ETF experts., “Market Liquidity Strains Signal Heightened Global Financial Stability Risk,” October 27, 2022.
2, “Active ETF Launches Are on the Rise,” October 31, 2022.
Not to be treated as tax advice. Please speak with a professional tax advisor.
Investing in ETFs involves risks, including loss of principal.

Investors should consider the investment objectives, risks, charges and expenses of the Fund/Portfolio carefully before investing. For copies of our prospectus or summary prospectus, which contain this and other information, visit us online at or contact your AB representative. Please read the prospectus and/or summary prospectus carefully before investing.

TAFI—Bond Risk: The Fund is subject to the same risks as the underlying bonds in the portfolio, such as credit, prepayment, call and interest-rate risk. As interest rates rise, the value of bond prices will decline. Below-Investment-Grade Securities Risk: Investments in fixed-income securities with lower ratings (aka “junk bonds”) are subject to a higher probability that an issuer will default or fail to meet its payment obligations. These securities may be subject to greater price volatility due to such factors as specific municipal or corporate developments and negative performance of the junk bond market generally, and may be more difficult to trade than other types of securities. Municipal Market Risk: Economic conditions, political or legislative changes, public health crises, uncertainties related to the tax status of municipal securities or the rights of investors in these securities may negatively impact the yield or value of a municipal security. Tax Risk: The US government and Congress may periodically consider changes in federal tax law that could limit or eliminate the federal tax exemption for municipal bond income, which would in effect reduce the income shareholders receive from the Fund by increasing taxes on that income. Derivatives Risk: Derivatives may be more sensitive to changes in market conditions and may amplify risks. New Fund Risk: The Fund is recently organized, giving prospective investors a limited track record on which to base their investment decision.
YEAR—Investment Securities Risk: To the extent the Fund invests in other funds, shareholders will bear to layers of asset-based expenses, which could reduce returns. Market Risk: The market values of the portfolio’s holdings rise and fall from day to day, so investments may lose value. Interest-Rate Risk: As interest rates rise, bond prices fall and vice versa; long-term securities tend to rise and fall more than short-term securities. Credit Risk: A bond’s credit rating reflects the issuer’s ability to make timely payments of interest or principal—the lower the rating, the higher the risk of default. If the issuer’s financial strength deteriorates, the issuer’s rating may be lowered, and the bond’s value may decline. Inflation Risk: Prices for goods and services tend to rise over time, which may erode the purchasing power of investments. Foreign (Non-US) Risk: Non-US securities may be more volatile because of political, regulatory, market and economic uncertainties associated with such securities. Fluctuations in currency exchange rates may negatively affect the value of the investment or reduce returns. These risks are magnified in emerging or developing markets. Derivatives Risk: Investing in derivative instruments such as options, futures, forwards or swaps can be riskier than traditional investments, and may be more volatile, especially in a down market. Below-Investment-Grade Securities Risk: Investments in fixed-income securities with lower ratings (commonly known as “junk bonds”) tend to have a higher probability that an issuer will default or fail to meet its payment obligations. Leverage Risk: Trying to enhance investment returns by borrowing money or using other leverage transactions such as reverser purchase agreements—magnifies both gains and losses, resulting in greater volatility. New Fund Risk: The Fund is a recently organized, giving prospective investors a limited track record on which to base their investment decision.
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