Liquidity

Liquidity measures how easily you can convert your investment into cash. Discover how it affects your index fund portfolio. Manage your liquidity with Index Balance.

Definition

Liquidity is the ability to convert an asset into cash quickly and without a significant loss of value. An asset is highly liquid if it can be sold almost instantly at the market price; it is illiquid if it takes time or requires significant discounts to find a buyer.

For the index fund investor, liquidity is a key advantage of ETFs over other investment vehicles. ETFs tracking global indices trade on stock exchanges with millions of euros in daily volume, meaning you can buy or sell in seconds at the market price. Traditional mutual funds, by contrast, are settled at the following day's closing price, which can be a disadvantage during periods of high volatility.

Index Balance lets you monitor each asset's weight in your portfolio and assess whether your liquidity level is adequate for your needs. Try it free at indexbalance.com.

Practical example

You have €20,000 invested in an MSCI World ETF and need €5,000 for an emergency. You can sell exactly the required amount in seconds during market hours and receive the money within 2 business days. Had you invested in property, the sale could take months and involve costs of between 5% and 10%. Index Balance calculates this automatically every time you update your portfolio.