Exchange traded funds (ETFs) offer investors many advantages,
including the ability to trade like stocks. Because of these
similarities, some investors mistakenly assume that, like
stocks, an ETF’s liquidity is dependent on its daily trading
volume. The reality is, however, the liquidity of an ETF is
primarily based on the liquidity of the stocks that make up
the ETF, not by the activity in the ETF itself.
For liquidity: look inside.
An ETF’s underlying stocks have the greatest impact on its
liquidity. If the underlying holdings are widely traded, their
trading costs are less expensive because there are enough
buyers and sellers to narrow the spreads. As a result, the
ETF is very liquid. Conversely, if the underlying stocks
are thinly traded, they are more expensive to obtain—the
spreads are wider and the ETF is less liquid. This point
about liquidity is important.
ETFs are subject to risks similar to those of stocks and may not be suitable for
all investors. Investment returns and principal value will fluctuate so that when
shares are redeemed, they may be worth more or less than original cost.
Securities are not guaranteed by any bank, are not insured by the FDIC or any
other agency, and involve investment risks, including the possible loss of the principal
amount invested.
RydexShares are distributed by Rydex Distributors, Inc., an affiliate of Rydex Investments.
For more complete information regarding Rydex funds, call 800.820.0888 or click here for a prospectus. Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. The fund's prospectus contains this and other information about the fund. Read the prospectus carefully before you invest or send money.
Key Points to Remember
An ETF’s liquidity is dependent on the underlying holdings’ liquidity
The creation/redemption process helps facilitate ETF liquidity
Arbitrage opportunities help keep ETF bid/ask spreads tight
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An ETF’s liquidity is