Abstract
Investors often use traditional measures to gauge liquidity and mispricing risk in exchange-traded funds. However, since the specialist or market maker can create new shares or redeem old shares of an ETF on a daily basis, historical measures can be deceiving. In essence, an ETF's liquidity is equal to the liquidity of the underlying basket of stocks. A recent study attempts to prove this theory and shows that liquidity is much higher than many believe and that mispricing risk is minimal.
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