ETFs combine the diversification and professional management of mutual funds with the trading flexibility of stocks. Like stocks, they trade intraday with real‑time pricing—but the ETF structure helps keep trading efficient, even in volatile markets.
Like a mutual fund, an ETF is a pooled investment vehicle, meaning it combines your money with other people’s money to invest in a portfolio of stocks, bonds and/or other securities. Unlike mutual funds, ETF shares trade like stocks on stock exchanges—bought or sold throughout the trading day at fluctuating prices.
Gain more insight: ETFs vs. Mutual Funds: What to Know.
*Most retail broker-dealers have reduced ETF commissions to zero. Please consult your broker-dealer on specific fees.
ETFs' structural differences offer a cost advantage over other investment vehicles.
ETFs have low administrative costs, resulting in lower expense ratios than mutual funds.
Note: ETFs may be subject to other costs such as bid-ask spread or brokerage fees that can vary by firm and ETF.
ETFs are generally traded on the secondary market and do not impact other shareholders.
ETFs can create and redeem shares ‘in-kind’, which can reduce taxable events and minimize capital gains distributions for investors.
ETFs can be bought and sold relatively quickly through a brokerage firm at market prices that can change throughout the trading day.
The creation/redemption process allows investors to buy and sell ETFs regardless of the ETF’s size or secondary-market volumes.
Most ETFs disclose their complete holdings daily, giving investors up-to-date information on what they currently own.
ETFs may be suitable for all kinds of investors aiming to build flexible and diverse portfolios.
The ETFs unique creation and redemption process provides the depth of liquidity to dynamically respond to investor supply and demand. This process ultimately ensures that ETFs trade close to their NAV throughout the day.
An ETF trade involves the transfer of shares in the secondary market between investors, with no impact on the ETF's underlying holdings.
Costs are usually paid by the investors directly involved in the transactions, minimizing impact to long-term investors in the ETF.
When the number of available ETF shares equals demand, the broker-dealer can immediately fulfill the investor’s order.
When there’s more demand to buy or sell an ETF than the existing inventory, large institutional investors called Authorized Participants (APs) step in. They work directly with the ETF issuer to exchange “baskets” of securities to create or redeem additional shares.
You are not alone when trading ETFs. From large to small trades to navigating market volatility, take advantage of the ETF community of professionals and the resources and tools they can provide. Their jobs are to support advisors in fulfilling their clients’ needs.
Advisors who are on institutional platforms have access to institutional block desks for ETF orders. These desks provide trade guidance, execution expertise, and advice on trading strategies.
The platform’s website or advisory help center will have contact information for the institutional block trading desk.
Advisors or institutional investors who are not on an institutional platform or do not have access to an institutional block desk should contact their broker/dealer ETF trade desk.
Sales representatives at the broker/dealer should be able to direct advisors to the relevant ETF trade desk.
A market maker exists to "create a market" for specific company securities by being willing to buy and sell those securities at a specified displayed price and quantity to broker-dealer firms that are members of the exchange. These firms help keep financial markets liquid by making it easier for investors to buy and sell securities–they ensure that there is always someone to buy and sell to at the time of trade.
Get tips to help you trade more strategically and use trading orders to your advantage.
The average daily volume (ADV) has always been a strong indicator of liquidity for stocks, but it’s not the sole indicator of an ETF’s liquidity.
The ADV of an ETF shows only what has been traded, not what can be traded. That’s because, unlike stocks that have a set number of shares, new ETF shares can be created and existing shares can be redeemed based on investor demand.
ETF liquidity encompasses not only the trading of the ETF shares themselves but also the liquidity of the underlying securities in the ETF’s portfolio.
There are three levels of liquidity to consider for ETFs: on-screen liquidity, broker-assisted liquidity and specialist-accessed liquidity.
Source: American Century Investments.
Current Bid-Ask Spread and Size Available to Trade
Trading activity that has already transpired and is visible in the secondary market, where ETFs are priced and traded like stocks.
Market Maker's Ability to Provide Liquidity for Larger Trades
With the help of a broker, market makers can access this level of liquidity.
Creation and Redemption Liquidity
Market makers can access the liquidity of the underlying securities to meet investors' demand. This process is done through the creation and redemption mechanism.
Different Levels of Liquidity That Give You Greater Market Access ETFs have different liquidity layers that allow investors to trade in amounts that can far exceed an ETF’s ADV without significantly affecting the price.
Think Low-Volume ETFs are Risky? Think Again
With a few simple steps, low-volume ETFs can trade efficiently—unlocking opportunities that many investors overlook.
ETF managers generally accommodate investment inflows and outflows through the in-kind share creation and redemption process, which enables them to shed securities that may generate significant capital gains.
ETF shares are bought and sold on the secondary market without transactions occurring among the underlying securities.
A sale that generates capital gains impacts only the person selling the shares—it does not create capital gains for all fund shareholders.
Trading in kind may help eliminate or significantly reduce costs compared to trading the underlying securities.
When managers rebalance an ETF portfolio, they typically apply tax management strategies, such as tax-loss harvesting, to help mitigate gains of distributions.
Mutual Funds: Flows into and out of the fund involve the manager selling the underlying securities in the portfolio. These sales are transacted in cash.
ETFs: ETF managers accommodate investment inflows and outflows generally through the in-kind share creation and redemption process.
Mutual Funds: Sales of underlying securities are cash transactions by the portfolio manager in the open market.
ETFs: In-kind transaction means shares are passed back and forth on the exchange and do not involve the sale of underlying securities.
Mutual Funds: Cash transactions are taxable events.
ETFs: In-kind transfers are not taxable.
Mutual Funds: The selling of securities to meet redemptions or reallocate assets may trigger capital gains for the fund and thus for all its shareholders.
ETFs: When ETF investors sell shares, the sale is facilitated by a market maker in the secondary market, with no capital gains impact on other ETF investors.
ETFs didn’t stop at passive. Today’s market includes active ETFs—strategies freed from index constraints but delivered in the same efficient, transparent structure advisors rely on.
Active/Strategic Beta/Passive Framework is credited to Ben Johnson at Morningstar.
It began in 2018 with a launch that included one of the first active fixed-income ETFs. We introduced Avantis Investors® in 2019, blending the consistency of indexing with the potential for outperformance through active management.
Today, our lineup offers financial advisors and investors varying levels of active management, leveraging both in-depth fundamental research and advanced quantitative methodologies.
Beta is a standard measurement of potential investment risk and return. It shows how volatile a security's or an investment portfolio's returns have been compared with their respective benchmark indices. A benchmark index's beta always equals 1. A security or portfolio with a beta greater than 1 had returns that fluctuated more, both up and down, than those of its benchmark, while a beta of less than 1 indicates less fluctuation than the benchmark.
The difference between the National Best Bid and the National Best Offer, which represents the implied cost to trade a security. As compensation for the risk taken, the market maker (or dealer) earns the bid/offer spread in exchange for facilitating the trade. Wider spreads generally indicate higher costs associated with trading the underlying assets in the ETF, hedging costs, inventory management costs, and general market risk.
Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's price.
The primary market is where ETF shares are created and redeemed amongst ETF issuers and authorized participants. This is where the underlying basket of securities that make up an ETF is created. Shares of ETFs are made in large batches called Creation Units—usually 25,000 to 600,000 ETF shares are created at a time through this process.
The vast majority of investors will only deal with the secondary market when buying and selling ETFs. This is where shares of ETFs are bought and sold amongst other investors on an exchange.
Exchange Traded Funds (ETFs) are bought and sold through exchange trading at market price (not NAV), and are not individually redeemed from the fund. Shares may trade at a premium or discount to their NAV in the secondary market. Brokerage commissions will reduce returns.
IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.
This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Diversification does not assure a profit nor does it protect against loss of principal.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.