ETF Partnerships Have Changed. Most Issuers Haven’t

The Early Days: When Market Makers Competed for ETF Launches

There was a time when launching an ETF meant market makers were actively competing to participate. They would step in to seed new products, commit capital early, and engage with issuers in a meaningful way from day one. Those relationships were driven by a combination of opportunity, economics, and the relatively small number of ETFs in the market at the time.a

A Different Market Structure, A Different Opportunity Set

The structure of the ETF landscape then was very different from what we see today. With fewer products available, early adopters—including institutional investors and hedge funds—were using ETFs for trading, hedging, and tactical positioning.

New ETFs that gained traction could generate meaningful volume quickly, creating opportunities for market makers to deploy capital and earn attractive returns.

From a trading perspective, spreads were wider, hedging was more complex, and the linkage between ETFs and their underlying markets was not as efficient as it is today. While that created additional risk, it also meant there was less competition among liquidity providers.

For a strong product with real demand, those early conditions could make participation highly profitable, particularly during the initial phase when seed capital was actively trading and turning over. Market makers were not just supporting ETFs. They were underwriting the opportunity.

The Shift: A More Crowded and Disciplined ETF Ecosystem

That environment has changed significantly. Today, the ETF market is far more crowded, with thousands of products competing for attention. Capital is more selective, balance sheets are more constrained, and market makers are more disciplined in how they allocate risk across products.

The economics that once justified aggressive participation in new launches are no longer as compelling in many cases. Despite this shift, many issuers continue to approach ETF partnerships as if the old model still applies.

Why Traditional Asset Management Relationships Fall Short

Building an ETF business today requires a different mindset and, in many cases, a different set of partners. Relationships that are valuable in mutual funds or SMAs do not always translate into the ETF ecosystem, where liquidity, trading expertise, and balance sheet capacity are critical.

Distribution, branding, and research remain important, but they do not replace the need for a functional trading infrastructure.

The Misconception: Relationship-Driven Liquidity

Too often, issuers still approach ETF partnerships through a more traditional lens. Prioritizing relationships built around meetings, conferences, and research coverage.

While those elements have their place, they are not what ultimately drives ETF liquidity. A steakhouse dinner and a well-written research report may support a broader relationship, but they do not create liquidity, tighten spreads, or improve execution.

The Hidden Risk of Relying on a Single Liquidity Provider

In practice, this gap often becomes visible when issuers rely too heavily on a single liquidity provider. While that partner may be experienced and well-capitalized, structural constraints—such as internal risk limits, capital allocation decisions, or regulatory requirements—can limit their ability to support the product consistently.

Even strong and well-established partners come with their own set of constraints. Banks and bank-affiliated market makers, for example, operate under regulatory and internal risk frameworks that can limit how much inventory they are able—or willing—to hold.

For bank-affiliated market makers, ownership levels approaching 25% can trigger regulatory and internal constraints, limiting their ability to warehouse inventory, especially in smaller ETFs. In products with limited float and more one-sided flows, these thresholds can be reached more quickly than many issuers anticipate. This is not a reflection of the partner’s capability, but rather the structure in which they operate.

When Liquidity Becomes Fragile

When liquidity becomes dependent on a single participant or a narrow set of relationships, it does not disappear, but it becomes fragile.

Fragile liquidity can lead to wider spreads, inconsistent execution, and a diminished trading experience for investors.

The ETF Ecosystem: Built on Networks, Not Individuals

The ETF ecosystem was designed to function through a network of participants. Multiple market makers, a diverse group of authorized participants, and active engagement across both primary and secondary markets all play a role in maintaining efficient trading.

When that network is properly developed, risk is distributed more effectively, and no single participant becomes a bottleneck.

A Modern Approach to ETF Partnerships

A modern approach to ETF partnerships should reflect this reality. Issuers should focus on building a diversified ecosystem that includes multiple market makers with different strengths, a broad and engaged AP network, and partners capable of supporting both primary and secondary market activity.

Just as importantly, these relationships need to be maintained and developed over time, not simply established at launch. The goal is not to have the most relationships. It is to have the right ones.

Product Complexity Matters More Than Ever

Understanding the product itself is a critical part of this process. Not all ETFs are created equal, and not all liquidity providers are equally suited to support every type of strategy.

An options-based ETF will trade and hedge very differently from a high-frequency equity product. A fund focused on less liquid emerging markets, currencies, or municipal bonds presents a very different set of challenges than a large-cap U.S. equity ETF.

Each of these areas tends to have market makers that specialize in those asset classes, and aligning with the right expertise can make a meaningful difference in execution quality and overall liquidity.

The Rise of Independent Market Makers

It is also important to recognize how the market-making landscape itself has evolved. Many of the leading ETF liquidity providers today are not traditional banks, but independent trading firms that have invested heavily in technology, risk management, and cross-asset capabilities.

These firms are often able to provide liquidity and execution quality that is equal to—or in some cases exceeds—that of more traditional institutions. As a result, issuers should be thoughtful about how they allocate relationships and avoid relying solely on legacy partnerships that may not be best suited for the ETF structure.

Partnerships Require Ongoing Commitment

At the same time, relationships matter. Expanding engagement with a broader group of market makers can demonstrate commitment and create stronger alignment over time.

When liquidity providers understand that they are part of a long-term partnership—not simply being used to quote a tight market—they are more likely to invest resources, allocate capital, and support the product through different market conditions. That level of engagement cannot be replicated through transactional interactions alone.

From Launch to Lifecycle: Building for Sustainability

Launching an ETF is no longer about assembling a list of recognizable names. It is about building a structure that can support trading, absorb flows, and adapt as the product grows.

The firms that recognize this are better positioned to succeed, while those that rely on outdated assumptions may find themselves reacting to liquidity challenges rather than preventing them.

The Missing Piece: Issuer Commitment

Having partners in place is only part of the equation. The depth of engagement behind those relationships often determines how much attention and support a product ultimately receives in the market.

Sometimes, issuers may have the right partners in place, but those partners are not fully committed. Because the issuer has not yet fully committed to the ETF wrapper.

Without that commitment to distribution, marketing, and consistent engagement, products can stagnate, volume remains limited, and liquidity providers have less incentive to commit capital in return.

Strong ETF partnerships are a two-way street. Commitment needs to come from both sides.

Disclaimer

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.