Hundreds of exchange traded funds (ETFs) might not get a chance to sprout because seed capital for these investments is scarce. Unlike traditional stocks that raise money through initial public offerings (IPOs), ETFs have grown because of the trading floor specialist firms that provide cash to nourish them out of infancy, reports David Hoffman for Investment News. Because of the huge overpopulation of new ETFs and the near extinction of specialists thanks to automated trading, seed capital just isn’t there. In turn, this could also cause ETF spreads to widen. Is there a remedy to the problem?
One particular initiative allows ETFs to select multiple liquidity providers. Nasdaq did this earlier this year by launching the Nasdaq ETF Market, which features "designated liquidity providers" that get incentives to support ETFs in their young days of trading.
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