By Tony Dong, MSc, CETF on March 3, 2026 Estimated reading time: 8 minutes

How to spot and avoid illiquid ETFs

By Tony Dong, MSc, CETF on March 3, 2026 Estimated reading time: 8 minutes

Low trading volume does not necessarily mean low liquidity. Here’s what actually determines how easy it is to buy or sell an exchange-traded fund.

Today’s column addresses a persistent concern I continue to hear from readers: the liquidity of exchange-traded funds (ETFs) or, more specifically, the fear of owning an ETF that appears thinly traded.

The latest example came from a discussion I had with a friend about the BMO S&P/TSX 60 Index ETF (ZIU). I had highlighted it as a lower-cost alternative to the iShares S&P/TSX 60 Index ETF (XIU), noting that it charges a 0.15% management expense ratio (MER) versus 0.18% for its competitor. 

Since both track the same underlying index and hold the same exposure, the cheaper option seemed straightforward, right? 

The investor pointed to trading volume. On February 17, 2026, just minutes before market close, ZIU had traded roughly 2,700 units that day. XIU, by contrast, had traded more than 3 million shares. On the surface, that comparison makes XIU look far more liquid.

Illiquidity can be a genuine risk for ETF investors. With thinly traded ETFs, market orders may execute at unfavourable prices, and even limit orders may not fill quickly or at the desired level.

The problem is that daily trading volume is not what ultimately determines ETF liquidity. In fact, it is one of the most misunderstood aspects of ETF investing. Unlike individual stocks, ETFs have a unique structure that allows liquidity to extend beyond what you see trading on the screen.

Here’s an explanation of how ETF liquidity actually works behind the scenes, what truly matters when you are placing a trade, and the real risks, if any, of owning a lower-volume ETF.

What actually determines ETF liquidity?

My friend was not entirely wrong. Trading volume does matter. For most securities, especially individual stocks, daily volume is the primary indicator of liquidity. Higher volume generally means tighter spreads and easier execution.

With ETFs, however, trading volume is a secondary consideration. The most important determinant of ETF liquidity is the liquidity of the underlying securities the ETF holds.

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When you buy or sell an ETF, you are transacting at the market price. The true value of the ETF, however, is measured by something called net asset value, or NAV. NAV is simply the total value of the ETF’s assets minus its liabilities, divided by the number of shares........

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