A growing number of ETF share classes face liquidity challenges due to limited capital available to market makers, constraining their ability to support new or less-traded fund structures. This bottleneck is particularly evident in niche and international ETFs.
- Average market-maker capital per ETF share class fell to $1.2 million in 2025, down from $1.8 million in 2022
- Non-U.S. equity ETF share classes average only $850,000 in allocated capital
- Bid-ask spreads on low-volume share classes are 30–50% wider than average
- Firms like Citadel Securities and Virtu Financial have reduced participation in low-volume share classes
- ETF sponsors are shifting to fewer share classes or synthetic replication to manage capital
- 40% increase in share class launches since 2021 has outpaced capital availability
Market makers are encountering structural constraints in deploying capital across ETF share classes, with available liquidity reserves falling short of rising demand. According to internal tracking data, the average capital allocation per share class has declined to $1.2 million in 2025, down from $1.8 million in 2022, despite a 40% increase in the number of share classes launched since 2021. This imbalance is especially acute in non-U.S. equity ETFs, where capital deployment per share class averages just $850,000. The shortage stems from tighter risk management policies at major market-making firms, which have reduced their overall balance sheet exposure amid increased regulatory scrutiny and volatile market conditions. Firms such as Citadel Securities, Virtu Financial, and Jump Trading, which historically supported 80% of ETF liquidity, have scaled back participation in low-volume share classes due to thin profit margins and higher operational costs per trade. As a result, certain ETF share classes—particularly those tied to emerging markets or thematic strategies—now experience bid-ask spreads that are 30–50% wider than the broad ETF average. The impact is most pronounced in share classes with average daily trading volumes below $5 million, where liquidity evaporates during periods of market stress. This capital constraint is reshaping ETF design, with fund sponsors increasingly opting for fewer, higher-volume share classes or relying on third-party liquidity providers. Some firms have also begun using synthetic replication for low-demand share classes to reduce capital requirements.