ETF Ecosystem

Adam Stewart

08 February 2022


ETF’s are funds, but they’re different than traditional mutual funds. ETF’s are securities, but they’re different than individual equities. It’s important to know how they’re different and how important market participants in the ETF ecosystem play critical roles.

Unlike traditional mutual funds, ETFs can be purchased or sold at any time during market hours, similar to an equity or fixed income security. ETFs will trade on an exchange and the value of the ETF will be dynamic throughout the day. In a traditional mutual fund, an investor will buy or sell at that day’s closing NAV, irrespective of the time of day the order is submitted. For ETFs, market makers do just that, they “make markets” in various ETFs during the day…that is, they are willing to be both a buyer and seller. Investors looking at interesting ETFs that might be smaller in assets and less liquid in terms of average daily volume sometimes mistakenly pass on opportunities because of those factors. Market makers, especially “Lead Market Makers” or LMMs will provide outsized liquidity to investors wanting to buy or sell many multiples of what is typically visible “on screen”. Market makers can easily facilitate this liquidity because they can “create” or “redeem” shares of the ETF working with Authorized Participants (APs).

 Rather than looking at the liquidity of the individual ETF, investors should understand the liquidity of the underlying holdings. The more easily tradeable the underlying holdings of the ETF are, market makers can more easily facilitate outsized liquidity for investors. Communication is an important part of this process…make sure to communicate with the ETF manager and make sure they are communicating with the fund’s Lead Market Maker. These simple conversations can make a positive difference for investors and open up opportunities for investments that might have been passed over because of liquidity concerns.



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The assertions and statements in this blog post are based on the opinions of the author and Liquid Strategies. The examples cited in this paper are based on hypothetical situations and should only be considered as examples of potential trading strategies. They do not take into consideration the impact that certain economic or market factors have on the decision making process. Past performance is no indication of future results. Inherent in any investment is the potential for loss. 

Adam Stewart

Adam co-founded Liquid Strategies in 2013 and serves as Portfolio Manager and Director of Trading for Overlay Shares.