Regarding exchange-traded funds, financial advisors are more knowledgeable about some facets of these investment vehicles than others. ETF risks? Yep, they get that. ETF liquidity? Not so much.

Cerulli Associates recently asked ETF product sponsors to rank advisor knowledge on various matters related to ETFs. On a scale of one to six (with six being the top score), advisors were considered most knowledgeable about ETF risks (5.1). Advisors were also pretty good when it comes to employing ETFs in portfolio construction and understanding the tax treatment of ETFs.

But advisors don’t seem to fully grasp the nuances of how ETFs trade or understand what ETF liquidity is all about, according to Cerulli.

“If you’re turned off by an ETF because you look at the trading volume and think it’s illiquid, that’s a misconception,” says Alec Papazian, associate director at Cerulli, a Boston-based research and consulting firm. “Trading volume doesn’t necessarily denote the liquidity of an ETF. You have to think about an ETF’s underlying securities and their bid/ask spreads.”

When it comes to stocks, thinly traded securities can experience distorted bid/ask spreads and can also be difficult to sell. As such, investors are often told to avoid thinly traded ETFs for the same reasons. But that can cause them to miss out on useful niche funds that, because of the “niche” nature of the fund strategy, will likely never have a lot of trading volume on the secondary market.

Trading volume on the secondary market is important for ETFs, but experts say the most accurate barometer of an ETF’s ability to trade is the liquidity of its underlying securities.

“You have to look at multiple factors to truly evaluate whether or not an ETF is liquid,” Papazian says.

When it comes to how to trade ETFs, Papazian notes, investors should avoid market orders and instead rely on limit orders. The reason? Bizarre price dislocations between fund prices and their net asset values aren't unheard of in an era of fast-paced electronic trading.

We all remember the flash crash in May 2010, but occasional price dislocations have occurred since then among certain ETFs. Some investors who placed market orders on those funds got zinged when those funds experienced wild, short-lived price swings.

Limit orders give you more control over the execution price of your trades.