Why ETF primary-market liquidity matters

Investors often focus on secondary-market liquidity when making decisions about buying and selling ETFs. But do they fully recognize the importance of the underlying primary-market liquidity?

In previous articles, we’ve sought to demystify secondary-market liquidity. However, this time, we thought it would be helpful to explore primary markets instead, where ETFs are created and redeemed. We’ll look at ETFs with abundant primary-market liquidity, such as those that hold Treasury bills like the Vanguard 0–3 Month Treasury Bill ETF (VBIL). 

We’ll also illustrate how ample primary-market liquidity can help optimize overall trading efficiency of ETFs. 

Ultimately, our goal is to equip advisors with an understanding of leveraging primary and secondary markets effectively.

To begin with, the chart below provides perspective on the two levels of ETF liquidity:

Assessing primary market liquidity

When assessing ETF primary-market liquidity, the first challenge is determining the cost of buying and selling an ETF’s underlying securities and the market depth of those securities.

These two factors can be measured by observing the spread and liquidity of an ETF’s basket of holdings.

• Basket spread: This refers to the cost of trading the underlying securities within the ETF’s basket, which is often indirectly passed on to clients. When a planned trade is large enough to require the creation of new shares or the redemption of existing shares in the primary market, the basket spread is often a better indicator of the secondary market trading costs.
• Basket liquidity: Being aware of underlying market liquidity and its depth is crucial when creating or redeeming ETF shares smoothly, as ample liquidity can suggest tight spreads in the primary market. The depth of the market is also essential. A security, such as a long-duration bond, may have a higher spread because its price is more volatile, yet, at the same time, it has ample liquidity. For example, a 30-year on-the-run Treasury bond may trade more broadly than a three-month Treasury bill because its higher duration results in greater price sensitivity to rate movements. But that doesn’t mean the bond is illiquid, especially compared to a long-duration corporate bond from a small issuance, which is likely to trade with less depth and wider spreads.

Given that the Treasury bill market has low spreads and great depth, it’s liquid and very easy to access. These primary market characteristics allow ETFs like VBIL to trade with minimal impact on the ETF price, even when a trade exceeds its average daily volume (ADV).

That is, when they’re traded correctly! 

Real-world example

Since the low-cost Vanguard 0–3 Month Treasury Bill ETF (VBIL) was launched in early 2025, it has gathered $3.2 billion in assets under management. It trades at a tight one-basis-point bid/ask spread. Moreover, its expense ratio is 7 basis points (bps), the lowest among all ETFs in its category.¹

That includes the biggest ETF in the category, the iShares 0–3 Month Treasury Bond ETF (SGOV), which has an expense ratio of 9 bps. The catch is that SGOV is slightly cheaper to trade on the secondary market than VBIL. This is due to differences in their share prices, as both VBIL and SGOV trade at a spread of about one penny per share. Notably, SGOV currently trades around $100, whereas VBIL currently trades around $75.²

That said, any sizeable trade in either ETF—say more than 5% of its ADV—could require the client’s liquidity provider to access the primary market to create or redeem the ETF. In doing so, they’d buy or sell underlying securities, which means they’d enter the extremely liquid Treasury bill market.

And while VBIL is relatively new and still building its volume—meaning a VBIL trade can reach the 5%-of-ADV threshold sooner than does an SGOV trade—there’s no compelling reason to worry. That’s because of the depth of liquidity linked to the ETF’s two layers of liquidity and, to return to our main point, the Treasury bill market’s plentiful liquidity.

We can observe the interplay between these two layers of liquidity by noting that VBIL’s spread in the secondary market is nearly identical to the spread required to create or redeem VBIL shares in the primary market.

That’s true even with very large primary market trades—an indicator of the depth of primary market liquidity. All of this mitigates the price impact of trades in the secondary market, particularly if you’re using the correct order type. 

It may be wise to avoid market orders in the secondary market and instead use a limit order. Limit orders can help cushion investors from unexpected market volatility or limited market depth and help safeguard the advantages of a low expense ratio. 

The primary takeaways

Advisors are all about prioritizing what’s in the long-term best interest of their clients.

Yet, selecting the right ETF is not always clear. These two takeaways should help you make better decisions when choosing an ETF:

• Clearly understanding how to evaluate both secondary and primary ETF liquidity dynamics can help you reach better decisions. If there’s substantial liquidity in an ETF’s primary market, you can still achieve great execution even if the trade appears to outsize the ETF’s secondary market liquidity.
• Even if both markets are highly liquid, using the right order is paramount. Limit orders or marketable limit orders can help avoid the risk of market impact costs.

1 Morningstar, Inc., as of September 30, 2025.

2 Both VBIL and SGOV trade at a spread of about one penny per share, though SGOV has a net asset value (NAV) share price of around $100 a share versus VBIL’s NAV of around $75.  This means that for a given dollar amount invested, investors would have to buy or sell a third more VBIL shares to complete the transaction.

For more information about Vanguard funds and ETFs, visit advisors.vanguard.com or call 800-997-2798 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

All investing is subject to risk, including possible loss of principal. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of a client’s account. There is no guarantee that any particular asset allocation or mix of funds will meet a client’s investment objectives or provide the client with a given level of income. Diversification does not ensure a profit or protect against a loss.

Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.

U.S. government backing of Treasury or agency securities applies only to the underlying securities and does not prevent share-price fluctuations. Unlike stocks and bonds, U.S. Treasury bills are guaranteed as to the timely payment of principal and interest. Note that some or all of the income from the U.S. Treasury obligations held in the fund may be exempt from state or local taxes.