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Victoria Tait is a journalist with InvestorDaily, a Morningstar publication.

Exchange-traded funds (ETF) are more liquid than they appear because of a dual mechanism that ensures they are actively traded at attractive prices, according to iShares director Jonathan Howie.

In the wake of the global financial crisis (GFC), European debt woes and the United States sovereign downgrade, an investment vehicle's ability to perform in times of market shock is of deep concern to investors.

Howie, iShares' Asia-Pacific capital markets director, said ETFs had a 20-year track record of remaining liquid at solid prices in times of market volatility. However, he said iShares introduced them to Australia four years ago, leading many to believe the vehicles were relatively untested.

"One of the lessons we've learned from the GFC is that if you wish to get out of the market, it's important that liquidity is there to support you at the time you wish to do it," Howie told the ETF Strategy Day conference in Sydney yesterday.

"If liquidity dries up, you're left holding a position. I think it's important that investors are given the opportunity to express their view and ETFs have certainly demonstrated that over a number of episodes." 

He said natural trade between equities ETF buyers and sellers, as well as arbitrage trading of the underlying equities by market makers and other liquidity providers, ensured the instruments remained liquid and the spread between bid and ask prices remained narrow.

Although ETFs have been embraced by the retail market because of their lower costs in comparison with those of managed funds, institutional investors often have access to index mandates at lower prices.

However, some industry commentators have said overall ETFs trade will get a boost when institutions put in dedicated trading desks.

"That's something we do see happening," Tria Investment Partners managing partner Andrew Baker told the conference.