Liquidity is one of the most important features attracting a diverse group of investors to exchange traded funds (ETFs). Here, we explain the mechanics of ETF trading and the roles played by key members of the liquidity ecosystem.
An exchange traded fund (ETF) is an investment vehicle whose shares trade intraday on stock exchanges at market-determined prices. ETFs are unique in that they offer two markets for trading — the secondary market, where most investors trade, and a primary market that supports the ETF’s liquidity and allows it to trade close to Net Asset Value throughout the day.
The below explains the key ETF trading activities highlighted in Figure 1.
ETFs’ unique creation and redemption process and secondary market trading involve a number of capital markets players who contribute to the ETF liquidity ecosystem, including:
Each of these capital markets players contributes to ETFs trading more efficiently throughout the day, which benefits both buyers and sellers. There are also economic benefits for the capital markets participants.
The ETF issuer develops ETF products, determines fund investment objectives, manages the ETF portfolio according to the fund’s objectives and oversees day-to-day operations. Within the organization, these three functions deal with market liquidity:
State Street launched the first US-listed ETF in 1993 Since then, ETFs have become an increasingly popular investment vehicle for both individual and institutional investors. Improving education about how ETFs are structured and traded is vital to helping investors understand the potential benefits of investing in ETFs.
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* This figure is presented as of June 30, 2020 and includes approximately $69.52 billion of assets with respect to SPDR products for which State Street Global Advisors Funds Distributors, LLC (SSGA FD) acts solely as the marketing agent. SSGA FD and State Street Global Advisors are affiliated.
Important Risk Information
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs’ net asset value. Brokerage commissions and ETF expenses will reduce returns. There can be no assurance that a liquid market will be maintained for ETF shares.
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Exp. Date: 01/31/2022