An Intertemporal Study of ETF Liquidity and Underlying Factor Transition, 2009-2014

This article seeks to determine the migration of exchange-traded fund (ETF) liquidity and its factor constituents in the U.S. market over time, with the ultimate goal of making the ETF market more efficient and transparent. Using a set of factors commonly thought to impact liquidity, the authors develop a four-factor liquidity scoring algorithm (A-C liquidity score), extending the 2009 study by Agrrawal and Clark. The most liquid ETFs typically have lower bid-ask spreads, higher market capitalizations, lower expense ratios, and higher average trading volumes. The transition of ETF liquidity over the 2009-2014 period indicates that there is liquidity persistence and factor strengthening across all variables. Bid-ask spreads and expense ratios have compressed, which is a good trend for investors