CONTRIBUTORS
Jason Xavier
Head of EMEA & Asia, ETF Capital Markets
Franklin Templeton
European regulations governing equities markets in the European Union, such as the Markets in Financial Instruments Director (MiFID I) and, more specifically for exchange-traded funds (ETFs), MiFID II, have significantly reshaped the European ETF trading landscape. MiFID II, which was rolled out in 2018, disrupted the dominance of traditional stock exchanges by opening the door to alternative trading venues, increasing competition and expanding investor choice. However, this democratization has also led to market fragmentation, with ETF trading now spread across multiple platforms and exchanges. In Europe, Multilateral Trading Facilities (MTFs) have emerged as key players. These MTFs can facilitate more rapid execution that can also potentially be more efficient. They offer liquidity providers access to streamlined trading and present clients with pre-trade pricing transparency.
At the same time, the emphasis on "best execution" has driven more complex and fragmented market structures, with many algorithms now ready to help capture fair value trading via traditional stock exchanges as well as “dark pools” and other exchange executing venues.
All of the above aim to ensure investors fully leverage the ETF wrapper’s trading characteristics for better trading outcomes wherever they choose to execute.
The future of ETFs: evolution and trends in fixed income
The ETF market continues to expand at a rapid rate, and there are some exciting trends shaping its future. One of the most significant growth areas is within fixed income. For me, this is where the ETF wrapper has created real structural change. Unlike stock markets, which have well-known, centralized exchanges (e.g., LSE, NYSE, NASDAQ etc.), the bond market operates differently. There is no single centralized exchange for trading bonds. Instead, bond trading occurs primarily in decentralized, over-the-counter (OTC) markets. ETFs have indirectly advanced this market structure, taking opaque OTC markets and successfully placing them on the same well-known exchanges around the world. The success of ETFs in further developing this market structure and creating more price discovery within fixed income has become evident in recent periods of market stress. Price discovery and execution transparency for fund assets is something that is only possible with the ETF wrapper. As a consequence, we believe the ETF wrapper will become mainstream for both passive and active fixed income pooled investments.
US vs. UK ETF activity: comparisons and interactions
In the United States, about 70% of ETF trading happens on exchanges, while 30% is over the counter (OTC).1 In Europe, including the United Kingdom, it's the opposite: 70% of trading is OTC, and only 30% is on exchanges.2
| US | Europe | |
| ETFs traded on exchanges | 70% | 30% |
| ETF over-the-counter trading | 30% | 70% |
| Trading volume | >80% | 6% |
| ETF listings (in thousands) | 4.0 | 3.8 |
| AUM in $USD trillions | 10 | 2 |
| % of global total AUM | 70 | 16 |
Sources: Bloomberg and J.P. Morgan ETF market guide: “What are the trends and themes to watch?” 22 October 2024.
It may also be helpful here to examine the pros and cons of each of the few methods for ETF trading: trading, risk trading and agency/algorithmic trading. Some key tips for trading ETFs include determining the time of day that seems more conducive to trading, considering your trade objective, choosing the right order type, and ensuring that an ETF is trading close to its fair value. ETFs can be traded on various venues either directly with brokers, or OTC via the MTFs I described above. The flexibility for trading and liquidity is again a key catalyst for further investor adoption of ETFs.
ETF liquidity during periods of market stress: performance and resilience factors
During periods of market stress, ETF liquidity can be a critical lifeline for investors. The structure of ETFs, which allows for continuous trading and relies on market makers to maintain liquidity, enables them to function even when underlying markets face pressure. A prime example of this occurred in March 2020, at the start of the COVID-19 pandemic when global markets were in turmoil. While underlying bond markets turned illiquid, fixed-income ETFs continued to trade actively on secondary markets, albeit at record discounts to their NAVs. We witnessed the resilience of ETFs at work then. They provided investors with access to liquidity and price discovery when traditional markets froze. The role of market makers and the ability of ETFs to aggregate liquidity across a basket of securities were key to keeping ETFs functional during the crisis. This also showcased ETFs as reliable vehicles for navigating market uncertainty.
EndNotes
- Source: Bloomberg and J.P. Morgan ETF market guide: “What are the trends and themes to watch?” 22 October 2024.
- Source: Bloomberg. 31 December 2025.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
For actively managed ETFs, there is no guarantee that the manager’s investment decisions will produce the desired results.
ETFs trade like stocks, fluctuate in market value and may trade above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns. ETF shares may be bought or sold throughout the day at their market price on the exchange on which they are listed. However, there can be no guarantee that an active trading market for ETF shares will be developed or maintained or that their listing will continue or remain unchanged. While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.
Commissions, management fees, brokerage fees and expenses may be associated with investments in ETFs. Please read the prospectus and ETF facts before investing. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated.