Almost Entire $8 Trillion ETF Market Hinges on a Few Key Firms

In the past five years, US ETF market assets have more than doubled, over 1,000 new funds launched, and annual trading volumes jumped by around $11 trillion. Yet there has been one exception to the explosive growth: The ranks of firms responsible for steering cash in and out of every product.

This cohort — known as authorized participants, or APs — are a type of broker-dealer indispensable to the smooth functioning of every exchange-traded fund in North America. But as the industry has swollen, their numbers have barely changed. In fact, the most active APs have been increasing their market share, strengthening a remarkable concentration in the underbelly of the now-$8 trillion arena.

Bloomberg News analyzed filings for more than 3,400 funds to show that, despite the industry’s breakneck expansion, more than half of all US ETF flows are handled by just three firms. For a majority of funds, more than 90% of all money entering or exiting funnels through three APs or fewer. Hundreds of ETFs reported only one active AP in the latest quarter for which full data is available, meaning they depended on a single firm to keep cash moving.

Three Banks Handle More Than Half of US ETF Flows

Funds with fewer active APs are prone to greater mispricing in stress scenarios, research shows. Mispricing — when an ETF trades at a premium or a discount to the value of the assets it holds — creates extra risk and potentially higher costs for investors. It also undermines the reliable functioning of one of Wall Street’s most popular investment vehicles.

“Our message is that investors and retail traders have to be aware of this,” said Taisiya Sikorskaya, a PhD candidate at London Business School who co-authored Two APs Are Better Than One: ETF Mispricing and Primary Market Participation. “This mispricing that we find exists exactly in times when investors would like to rebalance, would like to fly to safety.”

For most retail traders, the mispricing may not be immediately apparent since AP activity and a fund’s deviations from its assets often happen out of most investors’ sight. ETFs have become popular in part because they’re considered low-cost and efficient, yet in a market meltdown these attributes can fade — and a lack of APs exacerbates the problem.