ETF Liquidity: What You Really Need to Know

If you’ve ever looked up an ETF and thought, “This one doesn’t trade that much, is it safe to buy?” you’re not alone. As more Canadians turn to ETFs to build their portfolios, questions about trading volume and liquidity come up all the time — especially when it comes to smaller or newer ETFs.

Let’s break down how ETF trading actually works and why low daily volume doesn’t necessarily mean an ETF is hard to trade.

The ETF landscape in Canada has exploded. There are now more than 1,603 ETFs available in Canada — and the industry has grown to over $627 billion in assets¹. But not all ETFs are created equal when it comes to size and trading volume. 

• The top 100 ETFs represent 65% of all assets.² 
• The top 50 largest ETFs in Canada account for 56% of all Canadian ETF trading volumes.³ 
• Some smaller ETFs trade fewer than 20,000 shares a day.

So, should you avoid smaller ETFs? Not necessarily. The key is understanding how ETF liquidity works — and it’s not what most investors expect.

Myth: Low trading volume = poor liquidity.

Truth: ETF liquidity is tied to the liquidity of the underlying securities, not the ETF itself.

Unlike stocks, ETFs are open-ended — which means they can tap into a deeper layer of liquidity. If the ETF holds highly liquid securities (like big-name stocks or government bonds), then it, too, is considered liquid — regardless of how often it trades on the exchange.

Let’s look at three main sources:

1. Natural Exchange Liquidity

This is the basic buying and selling that happens between investors. The more popular the ETF, the more likely it is to have a deep market on the exchange.

2. Market Makers (also known as Designated Brokers)

These are financial institutions contracted to post buy and sell prices throughout the trading day. They ensure there’s always a price available and help keep the spread between the buy and ask prices tight.

3. Creation and Redemption Mechanism

If there’s more demand than supply, market makers can go directly to the ETF provider to create new units (or redeem them if supply exceeds demand). This helps keep the ETF’s price in line with its net asset value (NAV), even on large trades.

A single trade worth $80 million was executed in a Bond Index ETF and it didn’t budge the market price. That’s the creation and redemption process in action: the underlying securities provided the liquidity needed to meet the order efficiently.

Myth: Large ETF trades disrupt the market.

Truth: Market makers often hedge trades instantly, reducing any impact on the underlying holdings.

It’s a common misconception that the trade size will move through the quote book, or if the quoted depth on the ETF is smaller than the trade, the trade will not be filled or will be filled at a sub-optimal price. When in fact, ETF quotes are constantly refreshed and replenished.

Yes, really. Trading individual bonds over-the-counter (OTC) can be tricky. But bond ETFs trade on an exchange, making them easier — and sometimes cheaper — to buy and sell. Market makers often use a “liquid basket” of the most tradeable bonds to fulfill orders, which can result in tighter spreads than the individual bonds themselves.

To get the best ETF trading experience, follow these considerations:

Avoid trading at the open or close.

The first and last 10 minutes of the trading day can be volatile. Wait for the underlying markets to fully open or avoid the rush at the close.

Use limit orders.

A limit order lets you control the price you’re willing to pay or accept — great for keeping your trades efficient.

Trade when the underlying market is open.

For international ETFs, try to trade during the hours that the underlying market is open to avoid wider spreads.