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NYSE Looks to Boost Activity in Thinly Traded ETFs


The two most often cited reasons for ETF closures are lack of assets and volume. While some small, thinly-traded ETFs have delivered solid returns, size and perceived lack of liquidity as indicated by light volume numbers are contributing factors to both professional and retail investors overlooking funds afflicted by those traits.

The New York Stock Exchange is looking to breathe fresh life into thinly-traded ETFs with the introduction of a pilot program aimed incentivizing market makers to take on the role of being lead market makers (LMMs) in some lightly-traded ETFs. [Exchanges Ready ETF Liquidity Incentive Program]

“The program is a new and innovative way for market makers to be incentivized to take on the role of being a Lead Market Maker (LMM) in ETPs under an alternative fee structure. LMMs play a crucial role in promoting a consistent, fair and orderly market in their ETP assignments, benefiting both the issuer and the end investor transacting in those products,” said NYSE Euronext in a statement.

The program is optional, but it gives ETF sponsors the option “to choose the amount they would like to pay, between $10,000 and $40,000 per ETP annually, to be a part of the program. LMMs get fixed quarterly payments, rather than variable enhanced transaction rates, in return for meeting their monthly LMM quoting obligations,” said NYSE Euronext in the statement.

While the U.S. exchange traded products industry has witnessed exponential growth on the way to 1,500 ETFs and ETNs and $1.5 trillion in assets under management, the bulk of those assets are controlled by some of the most heavily traded ETFs. For example, the seven largest U.S. ETFs have a combined $343.5 billion in assets. That group includes the SPDR S&P 500 (SPY) , the Vanguard FTSE Emerging Markets ETF (VWO) and the SPDR Gold Shares (GLD) . [ETF Sponsors Tackle Liquidity Issues With Market Makers]

However, some of this top-performing non-leveraged ETFs are neither large nor heavily traded. Take the Market Vectors Solar Energy ETF (KWT) as one example. KWT is up more than 44% year-to-date, but has average daily turnover of less than 3,900 shares. Boosted by its exposure to Tesla (TSLA), the Market Vectors Global Alternative Energy ETF (GEX) has surged this year, but only trades an average of 12,520 shares per day. [Tesla Leads This ETF's Surge]

“For the purposes of the pilot program, ETP Issuers are limited to choosing up to 5 securities that are already listed on NYSE Arca, as well as any new securities that launch during the pilot program’s duration. Securities which have a Consolidated Average Daily Volume of greater than 1 million shares for the preceding 3 months, have suspended creations/redemptions or are ETNs are not eligible for this pilot program,” said Ryan Kirlin of NYSE Euronext’s global index and exchange traded products group.

Market Vectors Global Alternative Energy ETF

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of GLD and SPY.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.