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>People seem to find it weird that a basket of securities could be more liquid than the securities themselves Why would this be weird? A basket of securities
by phone8675309 6y ago
>People seem to find it weird that a basket of securities could be more liquid than the securities themselves
Why would this be weird? A basket of securities is more diverse which spreads out your risk. Therefore, it makes sense that, in general, it would be more liquid.
- whatok 6y agoThere's an additional liquidity transformation with the fact that a majority of trading in the underlying happens over the phone/chat. Lack of liquidity in the underlying is why all of these ETFs were trading at 5%+ discounts to NAV while something like SPY was much more well-behaved back in March.
- tripletao 6y agoLower / more diversified risk doesn't necessarily mean more liquid. For every big liquid ETF, there's many smaller ETFs with similar holdings and thus similar diversification and risk, but much lower volume, wider spreads, shallower order books, etc. Though I agree that long-term, smart investors will prefer to own a diversified product because of that lower risk. So it does make sense that whatever diversified product they choose becomes more liquid than its constituents, just for the small number of winners they coordinate on (thanks to better marketing, lower fees, better deals with market makers, etc.) and not all ETFs with comparable risk profile.