One of the advantages of exchange-traded funds (ETFs) compared to other investment vehicles is its relative liquidity. But what is liquidity for an ETF? How does that liquidity actually give ETF investors the upper hand, compared to other assets?
In essence, ETF liquidity refers to how easy it is for investors to buy and sell. When an ETF can be bought and then sold quickly for cash, it’s considered liquid.
Let’s take an extreme example. Physical real estate is pretty illiquid, compared to ETFs. To complete a real estate transaction, typically investors must follow a lengthy standardized process. First, the seller offers their property on the market. Then the buyer makes an offer. The seller accepts, an escrow is opened, financing is obtained, inspections are performed, and so on. All of this must resolve before the transaction completes. This process can take months, even years.
Compare that to buying or selling an ETF. A typical retail investor can simply go to their broker, buy shares of the ETF and sell them when they wish during normal stock market hours. All of that is primarily done online these days, which adds to the speed of an ETF transaction. As long as the market is open, investors can trade ETFs. It usually takes just a few minutes.
An investor who still wants real estate exposure could also use ETFs. As opposed to actually buying real estate, which could require a hefty down payment and financing, retail investors can get the same exposure via real estate-related ETFs — and in a cheaper, more diversified package, too!
