Cash & Liquidity ManagementInvestment & FundingCapital MarketsNasdaq aims to encourage smaller ETFs

Nasdaq aims to encourage smaller ETFs

The US exchange said it will introduce incentives from next month to make lower-volume exchange traded funds easier to buy and sell.

The US stock exchange Nasdaq plans to offer a helping hand to lower-volume exchange traded funds (ETFs), by increasing the amount paid to trading firms that support thinly-traded ETFs and helping investors find tighter spreads when executing orders.

Although the most popular ETFs and other exchange-traded products (ETPs) attract ample trading, lesser-known names are often more difficult to trade, which can contribute to wide bid-asks spreads on orders.

In a regulatory filing, the world’s second-largest exchange after the New York Stock Exchange (NYSE) said that in future it would pay more to firms that support trading in lower-volume ETPs while reducing rebates for higher-volume ETPs.

Nasdaq will also add rebates for new ETFs listed on its exchange and further incentives based on the amount of ETPs a firm supports. “We want to try to offer programs that help less-liquid products improve their trading quality,” said Jeff McCarthy, Nasdaq’s head of ETP listings.

The changes, effective from September 1, will see market makers earn rebates of 36 cents to 47 cents per 100 shares traded, depending on the volume of the ETP. Current rebates of 40 cents to 46 cents are not tied to trading volume. Firms may also receive rebates of up to 70 cents per 100 shares on new ETPs.

According to data issued by investment manager Morningstar, the US saw 264 ETPs launched in the past year, up from 241 in the prior year period. At the same time, the number of such funds trading fewer than 5,000 shares a day, on average, has grown nearly 10 percentage points to 31% in two years, reports XTF, a London Stock Exchange (LSE) group unit.

Separately, the Financial Times reports that the amount of new money raised by ETFs exposed to global stock markets fell by 85% in the first half of 2016 from a year earlier.

The FT cited data from research and consultancy firm ETFGI, showing equity ETFs that track an index attracted only a net US$15bn from investors in H1 2016, against US$102bn for the same period in 2015.

Ben Seager-Scott, director of investment strategy at wealth management firm Tilney Bestinvest, told the paper that equity ETFs were out of favour with investors due to volatile trading conditions in the early weeks of 2016, concerns about the impact of the UK’s vote on EU membership and renewed turbulence after the vote for Brexit on June 23.

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