Liquidity issues under microscope as ETFs start to move underlying markets

How easily the market maker can deliver or sell securities depends on the liquidity of individual securities in the ETF portfolio. Exchange-traded funds (ETFs) offer many benefits to investors, including flexible intraday trading, efficient market access and potentially lower costs. But one of the most important ETF features—their liquidity—is also one of the most widely misunderstood. While we believe that most investors are best-served by taking advantage of the diversification offered by ETFs and mutual funds, there could be a place for individual stocks and bonds in your portfolio as well. A common misconception is that ETFs with lower average daily volume (ADV) are not as liquid as others in the marketplace. ADV is generally a good gauge of liquidity for a single stock because the number of its outstanding shares is generally fixed.

ETF Liquidity Provider: Why It Matters and How To Choose One

Passive management and the creation/redemption process can help minimize capital gains distributions. Before transaction costs, this fund should track the index perfectly. A lot of people like to focus on the ETF’s expense ratio, or its assets under management, or its issuer. But to us, the single most important thing to consider about an ETF is its underlying index. By daily trading volume, the S&P 500 SPDR (SPY), Invesco QQQ (QQQ), and Financial Select SPDR (XLF) tend to be among the most active ETFs.

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Those market makers might have inventories or can use their balance sheet to fill ETF orders. Standard online $0 commission does not apply to over-the-counter (OTC) equities, transaction-fee mutual funds, futures, fixed-income investments, or trades placed directly on a foreign exchange or in the Canadian market. Options trades will be subject to the standard $0.65 per-contract fee. Service charges apply for trades placed through a broker ($25) or by automated phone ($5). See the Charles Schwab Pricing Guide for Individual Investors for full fee and commission schedules. When selecting an ETF, investors should consider factors such as its level of assets, trading volume, and underlying index.

ETF Liquidity Provider: Why It Matters and How To Choose One

With more than twenty years of experience, iShares continues to drive progress for the financial industry. IShares funds are powered by the expert portfolio and risk management of BlackRock. In addition, investors buy and sell ETF shares with other investors on an exchange. As a result, the ETF manager doesn’t have to sell etf liquidity providers holdings — potentially creating capital gains — to meet investor redemptions. Mutual fund shareholders, on the other hand, redeem shares directly from the fund. The fund manager must often sell fund securities to honor redemptions, potentially triggering capital gains which then trickle down to the fund’s investors.

Exchange Traded Funds: Mechanics and Applications

If an ETF invests in securities that have limited supply or are difficult to trade, this may impact the market makers’ ability to create or redeem units of the ETF which may then affect the portfolio’s liquidity. However, most Canadian-listed ETFs predominantly invest in liquid securities that trade on major exchanges around the world. Investors with large ETF trades can also tap into primary market liquidity by working with an authorized participant to create or redeem ETF shares directly with the fund company. However, even funds with limited trading volume can trade at tight spreads if the underlying securities of the fund are liquid. An ETF that invests in S&P 500 stocks, for example, will probably be more liquid and trade at tighter spreads than one that invests in Brazilian small-caps or alternative energy companies. Check the key statistics tab on any ETF to see a full breakdown of liquidity statistics.

At a fund level, managers should consider their choice of benchmark, index methodology and desired transparency. For active managers, existing indices may not be an appropriate benchmark for their strategy. Here, working with an index provider that can prototype and back test a custom index may be the best route. When executing a trade, it is important to seek price protection, especially during times of volatility. Financial professionals can contact us directly to speak with a BlackRock specialist about the investment approach of the fund and guidance on the execution of the trade. ETF structures matter because they can affect the level of risk in an ETF as well as the cost of managing it.

ETFs provide access to a wide range of investment options, covering a broad range of asset classes, sectors and geographies. Learn about the different types of exchange-traded products, how index and active ETFs are managed and more. Limit orders let you determine the maximum or minimum price at which you’ll execute an ETF trade. While limit orders offer you control over price, there is always some risk that your order won’t be fully executed. You set a price – the stop price – at which you automatically buy or sell. When the market hits the stop price, your stop order becomes a market order.

  • Units of the funds are not bank deposits and are not insured or guaranteed by any bank, government entity, the FDIC or any other type of deposit insurance.
  • State Street launched the first US-listed ETF in 1993 — the SPDR® S&P 500® ETF (SPY).
  • In addition to robust liquidity, a price transparency feature which investors may seek is information on the value of a fund’s assets.
  • The specialist can access additional data on the depth of liquidity and suggest a trading execution strategy.
  • The views and strategies described may not be suitable for all investors.

Under this circumstance, your ETF trading desk can be especially helpful by transacting with multiple brokers and generating a level of trading competition that can result in a favourable trade. TWAP and VWAP orders ensure your trade will be executed not at the lowest or the highest price but at an average of the two during the specified period of time. Launch day is always exciting, and there’s nothing more visible to a global audience than ringing the bell at the NYSE to mark the launch of a listed investment. As a global investment manager and fiduciary to our clients, our purpose at BlackRock is to help everyone experience financial well-being. Since 1999, we’ve been a leading provider of financial technology, and our clients turn to us for the solutions they need when planning for their most important goals.

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In any case, the investor will have to contend with the tax issue. If the ETF was held in a taxable account, the investor will owe taxes on any capital gains. Nearly 3,000 ETFs are listed on U.S. exchanges with combined assets exceeding $7.4 trillion as of August 2023. In fact, the flip side to the phenomenal growth in ETFs is that it increases the risk that some of them will be liquidated, primarily due to a lack of investor interest.

ETF Liquidity Provider: Why It Matters and How To Choose One

Whether you’re looking to build wealth, or to just save up for a vacation, iShares ETFs can make investing as easy as choosing a playlist of songs. They’re low cost — which can help you invest more of your hard-earned money. When you want to listen to songs from a certain era or genre, it takes time and effort to research artists, pick individuals songs, buy those songs, and put it all together. Authorised participants (APs) are the institutions authorised to interact directly with an ETF manager to create and redeem large blocks of ETF shares. Analytics help us understand how the site is used, and which pages are the most popular. Charles Schwab Investment Management, Inc. (CSIM), is the investment advisor for Schwab ETFs.

In the secondary market (i.e., the stock market), liquidity is described through the trading volume of the underlying securities in the ETF and their bid-ask spread. A narrower spread frequently signifies higher liquidity and lower trading costs. As a general rule, trading at times when it is difficult for market makers and other institutional investors to hedge underlying securities in an ETF will likely result in wider spreads and less efficient trades. This is typically the case just after U.S. equity markets open and just before they close. In that interval, the underlying securities are less liquid, which can result in wider bid-ask spreads. Unlike ETFs, which are traded on exchanges like stocks, mutual fund shares are bought and sold directly with the fund at the day’s closing NAV.


These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries. Funds that concentrate investments in specific industries, sectors, markets or asset classes may underperform or be more volatile than other industries, sectors, markets or asset classes and the general securities market. Small-capitalization companies may be less stable and more susceptible to adverse developments, and their securities may be more volatile and less liquid than larger capitalization companies. Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF.

ETFs can offer exposure to a portfolio of securities representing asset classes like stocks or commodities, specific sectors like information technology, various countries and regions, or different types of bonds. Visit to view a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and consider carefully before investing. Market makers and liquidity providers provide intraday liquidity for securities on the stock exchange. They compete for orders by publishing bid and ask quotes for a number of shares. This will include choosing a custodian and perhaps a distributor, sub-advisor (for portfolio management) and compliance function. An investment firm can build certain of these services in-house, work with a ‘white label’ provider, or choose one or more companies to outsource them for a fee.

Some indexes weight their holdings more or less equally, while others allow one or two big names to shoulder the burden. Some aim for broad market exposure, while others take risks in an attempt to outperform the market. You can find all this information in the offering prospectus, fact sheet of any ETF, or on the “Portfolio Composition” tab of Fidelity’s fund pages. Suppose a firm named GreenTech ETF tracks the clean technology sector.

Insights from Fidelity Wealth Management℠

Exchanges give firms looking to market publicly listed securities the platform to do this. The choice of the index or sector tracked by an ETF can significantly affect its liquidity. If an ETF tracks a well-known, widely followed index with liquid underlying assets, it’s likely to have better liquidity.

Small-cap shares tend to have wider spreads, causing small-cap ETFs to have relatively larger premiums and discounts. ETFs in some asset classes – for instance, fixed income – tend to have relatively large and constant premiums and discounts. A major reason for this occurrence is the pricing difference between the ETF and the underlying bonds.

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