Liquidity of index ETFs vs Index Funds

Are index funds more liquid than index ETFs? For example, say if one or more of components of an index have low liquidity, will that affect the liquidity of the ETF? As a point of note: I am specifically interested in nifty bank ETF (offered by SBI, HDFC, etc). For nifty bank, I couldn’t find any index fund but only index ETF

The standard concept of liquidity, which is the availability of units does not apply to index funds, the fund house can create as many units as they want. ETFs on the other hand can be illiquid, when the price falls, less buyers. Even here the market participants try to bring in liquidity, but the premium or discount, i.e. the difference between its NAV and the CMP could be big.

The liquid of a particular stock is a different thing, even here, the large caps have good liquidity, and liquidity decreases as you go down from market cap.

As far as the Nifty Bank index is concerned, the big 5 banks constitute 80% of the index, so there is no dearth of liquidity as they are traded a lot.

So look at the liquidity of the ETFs that you are interested in, also when they were launched, what is their AUM, what is the NAV-CMP difference etc.

Many things may have changed since the publishing of those articles.

1 Like