A major financial institution has raised a red flag about potential stress points in the massive exchange-traded fund (ETF) industry. RBC Capital Markets warns that the capital reserves of key market-making firms are not infinite and could be strained by a potential flood of new product listings expected in 2026.
The Looming Bottleneck in a $13 Trillion Industry
This concern stems from a pivotal regulatory shift. The US Securities and Exchange Commission (SEC) is set to allow asset managers to offer ETFs as share classes of existing mutual funds. Following formal approval granted to Dimensional Fund Advisors last month, dozens of other giants like BlackRock Inc., Fidelity Investments, and T. Rowe Price Group are awaiting similar clearance. The first such products could launch early next year.
Valerie Grimba, director of global ETF strategy at RBC Capital Markets—one of the top-10 largest ETF market-makers—highlighted the core issue. She explained that market-makers provide essential liquidity by trading ETFs throughout the day and providing initial capital, known as 'seeding,' for new fund launches. Their balance sheets, however, are a finite resource.
"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 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."
Concentrated Power and Selective Partnerships
The risk is amplified by the highly concentrated nature of the market-making ecosystem. While there are over 250 ETF issuers, the industry is serviced by only about 15 market-making firms. Data from Bloomberg Intelligence reveals that the top five—Jane Street, Virtu, Susquehanna, Citadel, and GTS—act as the lead market maker for more than 70% of all ETFs.
Grimba predicts that in a scenario with hundreds of new dual-share class listings, these firms will become more selective. They will likely prioritize asset managers with whom they already have established economic relationships, such as partnerships on index rebalancing or derivative structures.
"Market makers are going to be more selective with the ETF issuers that they work with," Grimba said. A key worry is that this dynamic could inadvertently sideline smaller, innovative fund managers. "We just want to make sure that even the smaller, more innovative ETF asset managers are able to come to market and not be hamstrung by us just working with the largest providers."
Industry-Wide Concerns and Preparations
RBC's warning is not an isolated view. The potential operational and market-structure challenges have made some major players cautious. For instance, Capital Group has notably held back from filing for permission to use the new dual-share class blueprint due to these complexities.
Anticipating a deluge of new activity, exchanges are also gearing up. Nasdaq Inc. is reportedly increasing its staffing levels to handle the expected surge in new listings and trading volume that the 2026 rule change may trigger.
The coming year will be a critical test for the infrastructure of the $13 trillion ETF industry. The success of the innovative dual-share class model may hinge on whether the concentrated market-making community can efficiently allocate its finite capital across a significantly expanded universe of funds.
