Liquidity is a critical factor in ETF investing and affects how easily investors can enter or exit a position. A clear understanding of liquidity can help investors trade more effectively and reduce costs.
ETF liquidity operates on two levels: the liquidity of ETF shares on the exchange and the liquidity of the underlying securities. Even if an ETF’s daily trading volume seems low, it may still be highly liquid if its underlying holdings trade frequently in the open market.
Market makers and authorized participants facilitate ETF liquidity by creating and redeeming shares to meet investor demand. Their activity helps maintain tight bid-ask spreads and helps ensure ETF prices reflect the value of their holdings.
During volatile markets, spreads may temporarily widen. Using limit orders and avoiding trading around the open or close can help ensure more efficient execution.
The Roles of Authorized Participants and Lead Market Makers
Behind every ETF’s trading efficiency are two key players:
- Authorized Participants (APs)—specialized institutions that create and redeem ETF shares through in-kind transfers of securities.
- Lead Market Makers (LMMs)—trading firms designated by the exchange to support consistent liquidity and fair pricing throughout the day.
Together, they help ensure ETFs trade smoothly, maintain tight spreads, and stay aligned with their true value.
At New York Life Investments, we maintain strong partnerships with both APs and LMMs across our ETF lineup. These relationships support consistent liquidity, efficient pricing, and a positive trading experience for investors.
For financial advisors, explore our ETF Tool Kit for more information on ETF trading and liquidity.
All investing involves risk, including possible loss of principal.
This material contains general information only and does not take into account an individual’s financial circumstances; is intended to be educational and informative in nature; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial professional before making an investment decision. The information discussed is strictly for educational purposes and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
