ETFs have reshaped investing for the better, expanding investors’ access to diverse and previously unavailable strategies, lowering investment costs, and promoting tax efficiency. Arguably, one of the paramount benefits is the liquidity and tradability that ETFs provide, offering investors an efficient trading vehicle for targeted market exposure.

Four key players are integral to bringing such liquidity to any ETF transaction. Investors place orders to buy and sell ETFs on the exchanges. The exchanges create an orderly secondary market between investors and market makers. The market makers post quotes and execute investor transactions, often creating or redeeming ETF shares in the primary market with the ETF issuers. 

“Exchanges are at the heart of the ETF ecosystem, providing the necessary infrastructure for listing and trading, and ensuring ETFs meet certain criteria to be accessible to investors,” said Robert Marrocco, vice president and global head of ETF listings at Cboe Global Markets.

The exchanges essentially represent the “E” in ETFs, said Douglas Yones, head of exchange traded products at the New York Stock Exchange. “Our role is to ensure our listed ETFs are traded in a highly liquid market with exceptional price transparency, so that investors can enter and exit their investments as easily as possible.”

But the exchanges also do far more behind the scenes beyond being a listing venue, said Alison Doyle, head of ETF listings at Nasdaq. Just for example, she said, they “can help connect issuers with market makers who are most proficient in certain asset classes and would be best suited to support their product.”

Near-perfect liquidity in trading—low costs; narrow bid-ask spreads; tight alignment between market price and NAV; and instant, seamless execution—is the holy grail that all players in the ETF ecosystem strive for.

Each exchange offers a variety of programs and incentives for market makers to maximize the liquidity of all the ETFs listed on their exchange. For example, there are incentives for designated and lead market makers to meet certain requirements, including the quality of auctions, trading depth, and time with the best bids and offers. They also strive to attract more market-making firms to provide liquidity to ETFs.

Each exchange also has programs unique to it. Collectively, the goal of these programs at the three exchanges is to create a deep, liquid, and tightly traded market for the ETFs listed on the exchanges—all to the benefit of the end investor. 

The three exchanges have seen rapid growth in both the quantity and variety of ETFs—a trend that’s not likely to slow down.

“ETF trading has grown to be a substantial percentage of the daily trading in the equity market,” Doyle said. “In 2023, ETF share volume was as high as 29% of total equity volume on some trading days, as ETFs prove to be the vehicle of choice both for strategic long-term investments as well as for tactical trading during times of volatility.”

“This year is already shaping up to be an exciting time for the industry as new innovative products come to market and drive growth,” Marrocco added. “More investors are looking towards derivatives-based and defined-outcome ETFs, so we expect to see more interest from issuers to find the right strategy.”

Other innovations may be conversions of existing strategies into a new form.

For example, Yones said, “we anticipate that actively managed ETFs and access to new investment styles within an ETF wrapper will continue to remain growth areas over the next decade. Approximately one-third of all net cash flow into ETFs this year has been in actively managed ETFs.

“Today, investors have more access, more strategies in an ETF wrapper, and more opportunities for ETF education than ever before as we continue to invest in the growth and innovation of the ETF marketplace.” 

• The five factors that make up total ETF costs (article, issued March 2024)
• ETF premiums and discounts, explained (article, issued August 2023)
• Considerations for ETF trading strategies (article, issued December 2023)