The role of ETF issuers and designated brokers
One of the characteristics of ETFs is the intervention of designated brokers, often called “market makers”, who ensure continuous liquidity. ETF issuers work with these brokers to create and redeem units, a process that keeps the ETF’s price aligned with its net asset value (NAV). Market makers play a vital role in efficient trading, quoting prices and maintaining tight spreads between bid and ask prices, which benefits investors.
In Canada, the selection of market makers is a thoughtful process. ETF issuers typically choose partners based on their ability to manage inventory, their expertise in specific asset classes and their ability to maintain competitive spreads. This ensures a smooth trading experience, especially during times of market volatility.
Liquidity Considerations for Actively Managed ETFs
A common concern among advisors is actively managed ETFs that are not fully transparent about their investments. Unlike index ETFs, which disclose their portfolios daily, some actively managed ETFs may limit transparency to protect their proprietary strategies. While this practice is increasingly common in the United States, Canada remains cautious, with regulatory frameworks that emphasize investor protection and transparency.
A key question is whether reducing the number of market makers for these ETFs could impact liquidity or tradability. While it is true that fewer market makers could potentially widen bid-ask spreads, the Canadian market mitigates these risks through rigorous regulation. The Canadian Investment Regulatory Organization (OCRI) ensures that market participants follow rules that prioritize fair pricing and market stability.
Does the reduction in the activity of market makers have an impact on fair value?
When an ETF has fewer market makers actively quoting prices, there may be concerns about trading efficiency. However, Canadian ETFs benefit from double protection: rigorous regulation and sophisticated trading mechanisms.
Canadian ETFs are protected by strong regulatory frameworks. OCRI and the various Canadian exchanges require that an ETF’s registered traders (designated brokers) adhere to strict standards for listing and pricing, which ensures a fair valuation. Furthermore, liquidity is not only influenced by the number of market makers. The liquidity of an ETF’s underlying securities often plays a more crucial role. Advisors should consider metrics such as bid/ask spreads and average daily trading volume when evaluating the marketability of an ETF.
Role of the ACFNB in the training of advisors and investors
ACFNB understands the importance of giving advisors the knowledge to confidently recommend ETFs to their clients. We actively collaborate with the advisor community to demystify concepts like liquidity, tax efficiency and the implications of regulatory changes, including the transition to T+1 settlement cycles. By promoting a better understanding of these concepts, we want to help advisors make informed decisions that align with their clients’ investment objectives.
The ETF landscape in Canada continues to evolve, driven by innovation and a strong commitment to investor protection. As we navigate emerging trends, such as semi-transparent ETFs and products focused on environmental, social and governance (ESG) factors, ACFNB remains committed to answering the questions that matter most to advisors and their customers.
For more information or to access ACFNB educational resources, visit https://cetfa.ca/.
Sources :
Par : Ronald C. Landry, President, ACFNB
