Mutual Funds

Exchange-Traded Funds

Why do ETFs experience volatility in prices and liquidity?

Since exchange traded funds generally try to mimic the holdings and performance of various market indexes, if any heavily weighted individual share within an index experiences a severe drop, the market in general may experience a severe drop, and the ETF may experience an even worse drop. Since the prices of the underlying exchange drop precipitously, the prices of the ETF may also drop, and few buyers of the ETF may be found, further deflating the price of the ETF, thus affecting its liquidity.


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