A fund's liquidity and the liquidity of its holdings are related but distinct. The relevant mechanism depends first on the kind of fund and on the route a shareholder takes when exiting.
Two kinds of funds, two mechanisms
An ETF shareholder sells shares on an exchange. The visible bid, offer, depth, spread, and trading volume show how readily those shares change hands at that moment. Yet ETF liquidity depends on the underlying basket as well. Authorized participants and market makers create or redeem shares against that basket, so an ETF may trade more readily than its displayed volume suggests; their willingness and cost to do so still depend partly on the liquidity of the underlying assets. Exchange activity is therefore the direct evidence of secondary-market liquidity, while the basket determines how much further liquidity can arrive and at what price.
An open-end mutual fund works differently. Its shares lack an exchange market; a shareholder redeems directly from the fund at net asset value. The fund can meet that redemption from cash, new subscriptions, a credit line, or sales of portfolio positions. The relevant evidence is therefore the fund's actual redemption activity and its capacity to meet redemptions smoothly. As covered in What a fund's redemption record reveals about liquidity risk, monthly sales and redemption filings show how quickly shareholders have entered and exited the fund relative to its size. That history describes the demands placed on the fund by its real shareholder base, rather than a theoretical liquidation of the full disclosed portfolio.
The portfolio-based approach tempts because the holdings are concrete and can be examined position by position. But public holdings disclosures are snapshots that may lag by weeks, as explored in How stale is a fund's publicly disclosed portfolio. A detailed but stale portfolio can feel more rigorous than a current redemption ratio even while offering weaker evidence of the risk under measurement.
The portfolio still matters. Large mutual-fund redemptions may force sales, and hard-to-trade positions can raise transaction costs or dilute the shareholders who remain. Likewise, an ETF with illiquid assets may develop wider spreads or trade farther from net asset value when market makers struggle to hedge or transact in the basket.
So two questions arise: how readily can the shareholder exit, and what happens inside the fund when that exit occurs? The fund's trading or redemption record addresses the first directly. The underlying holdings explain the capacity, cost, and consequences of meeting that demand.