Financial institutions are sounding the alarm about potential pressure points in the massive exchange-traded fund industry as a significant regulatory change approaches. Analysts warn that the system supporting the $13 trillion ETF market could face strain due to a wave of new product listings expected in 2026.
Regulatory Shift Spurs Anticipation and Concern
The catalyst for this concern is a pivotal move by U.S. regulators. The Securities and Exchange Commission is set to allow asset managers to offer ETFs as share classes of existing mutual funds. This dual-share class structure is anticipated to trigger hundreds of new ETF listings starting next year.
Valerie Grimba, director of global ETF strategy at RBC Capital Markets, has highlighted a critical constraint. RBC, one of the top-ten largest ETF market-makers globally, points to the finite capital resources available to market-making firms. These firms are essential for providing intraday liquidity and seeding new fund launches.
"There are some finite resources in the system. One that’s very important is, of course, a balance sheet, or capital that is put up by market makers," Grimba stated during an appearance on Bloomberg Television's ETF IQ. "That is a finite resource that probably is going to be constrained if you see the number of ETFs grow."
A Concentrated Ecosystem Faces a Potential Bottleneck
The heart of the issue lies in the concentrated nature of the market-making ecosystem. While there are over 250 ETF issuers, only about 15 market-making firms serve the entire industry. Data from Bloomberg Intelligence reveals that the top five players—Jane Street, Virtu, Susquehanna, Citadel Securities, and GTS—act as the lead market maker for more than 70% of all ETFs.
Grimba explained that market-makers will likely prioritize working with asset managers with whom they already have established economic relationships. These relationships often involve trading during major index rebalances or collaborating on complex derivative structures.
"Market makers are going to be more selective with the ETF issuers that they work with," Grimba noted. The concern is that this selectivity could disadvantage smaller, innovative asset managers trying to enter the market.
Industry Prepares for Incoming Wave
Anticipation is already building for the first launches. The SEC gave formal approval to Dimensional Fund Advisors last month, paving the way for its ETF share classes to launch early next year. Dozens of other heavyweight firms, including BlackRock Inc., Fidelity Investments, and T. Rowe Price Group, are awaiting similar regulatory green lights.
This looming expansion has prompted action across the industry. For instance, Nasdaq Inc. is reportedly staffing up in preparation for a potential deluge of new listings. However, not all firms are rushing in. Some major issuers, such as Capital Group, have cited potential operational and market-structure challenges as reasons for holding back from filing for permission to use the new fund blueprint.
Grimba's warning from RBC underscores a crucial juncture for the ETF industry. As it stands on the brink of a major structural evolution, the finite capital of key market-making players may become the critical bottleneck that shapes which new funds succeed and which struggle to gain traction in a suddenly more crowded marketplace.
