5 Popular ETFs with Hidden Liquidity Risks Every Investor Should Watch

Exchange-traded funds (ETFs) have revolutionized investing with their low costs, tax efficiency, and ease of trading. But not all ETFs are created equal when it comes to liquidity. While an ETF might trade actively on the surface, what lies beneath—the liquidity of the underlying assets—can pose serious risks, especially in times of market stress. In this article, we spotlight five well-known ETFs that, despite their popularity, carry notable liquidity risks investors should understand.

1. iShares iBoxx $ High Yield Corporate Bond ETF (HYG)

Liquidity Risk: Junk bonds are notoriously harder to sell during times of volatility. HYG itself trades with high volume, but its underlying high-yield corporate bonds don’t have the same liquidity. In a selloff, this mismatch can lead to wider bid-ask spreads or price dislocation between the ETF and its net asset value (NAV).

2. SPDR Bloomberg Emerging Markets Local Bond ETF (EBND)

Liquidity Risk: EBND holds local currency-denominated bonds from emerging markets—an asset class that can dry up quickly during geopolitical shocks or rate spikes. These bonds often lack centralized trading markets, which increases the difficulty of executing large trades at fair prices.

3. VanEck Vectors Oil Services ETF (OIH)

Liquidity Risk: OIH invests in a narrow group of oil service companies, many of which have relatively low trading volume and high volatility. Energy sector shocks or credit stress can exacerbate illiquidity, particularly in smaller-cap holdings. This becomes a concern when ETF volumes surge but underlying shares don’t trade with the same flexibility.

4. Invesco DB Commodity Index Tracking Fund (DBC)

Liquidity Risk: Commodity ETFs such as DBC face unique liquidity challenges. Many commodities are thinly traded, and the ETF’s structure often relies on derivatives or futures contracts, which can become illiquid or expensive to roll during periods of stress. This can lead to tracking errors, wide bid-ask spreads, and even forced liquidations if the underlying markets freeze up.

5. ARK Innovation ETF (ARKK)

Liquidity Risk: ARKK holds a concentrated basket of growth and tech-focused small- to mid-cap stocks. While it’s actively traded, many of its holdings are relatively illiquid and thinly traded. When ARKK faces large inflows or outflows, it may struggle to adjust positions without impacting market prices, potentially amplifying volatility.

Key Takeaways

Surface Liquidity Can Be Misleading: Just because an ETF trades frequently doesn’t mean its underlying assets do. Liquidity mismatches can lead to significant NAV dislocations in volatile markets.

Understand What’s Inside: ETF transparency allows investors to examine what they’re really buying. Sectors like high-yield debt, emerging markets, or thematic tech often contain less liquid instruments.

Market Stress Magnifies the Risk: In calm markets, these ETFs may function smoothly. But in downturns, liquidity risks surface quickly—just when investors need reliability most.

Before clicking “buy,” investors should look beyond the ticker and evaluate how easily the ETF and what it holds can be sold when it really matters.