Private banks face ETF liquidity test

Europe’s ETF and ETP market reached $3.8 trillion by the second quarter of 2026, and US issuers launched roughly 1,000 ETFs in the first half of 2026. Market participants say the surge in products has increased liquidity risks for private banks that execute large client orders.

The new funds cover a wide range of asset classes, including thematic, fixed-income and alternative strategies. About 25% of recent launches are tied to more complex or niche strategies, expanding the number of ETFs backed by less-liquid underlying assets.

ETF liquidity visible on trading screens depends on the liquidity of the securities inside the fund. More than a quarter of ETFs now trade fewer than 5,000 shares a day, a level that can make it difficult to fill large orders on the secondary market without moving prices.

When large ETF trades cannot be absorbed by secondary-market liquidity, brokers and banks may need to transact the underlying basket directly. That process raises execution costs and can cause price dislocation between the ETF price and the net asset value of its holdings.

Market stress has produced large gaps between ETF prices and underlying values. In March 2020, amid a freeze in cash bond trading, some bond ETFs traded at discounts of about 4%, and certain funds backed by 20-year US Treasuries traded around 5% below their net asset value.

Private banks handling sizeable client positions must monitor underlying markets, engage multiple market makers and select execution windows to reduce price impact and costs. Arthur Azizov, CEO and founder of B2Broker Group and B2BinPay, wrote: “Execution can be a major competitive advantage for private banks working with sophisticated investors, because it requires specialist monitoring and judgment that clients cannot provide themselves.”

Industry practitioners note that simply adding more ETFs to a product shelf does not address the operational and market-making challenges of handling large orders. They say banks need processes to measure the real cost of trades and to route large orders in ways that limit disturbance to underlying markets.