When I began working in ASX Investment Products in 2019, the Australian ETF market stood at around $42bn. Seven years later it sits at approximately $330bn. Over that period, a steady stream of new funds has entered the market, often built around innovative strategies, competitive pricing or differentiated portfolio construction.
Yet despite this growth and the constant flow of new listings, ETF assets remain concentrated among a relatively small number of issuers.
Why is that?
You could attribute this simply to the fact that many of the largest issuers track major indices. But that explanation leaves a lot still to be understood.
The Incumbency Advantage
Many investors already hold core exposures through established products. In Australia, broad market ETFs such as VAS, STW and IOZ have been deeply embedded in portfolios across advisers, institutions and self-directed investors for years.
For many advisers, the exposure has worked well for their clients. As portfolios grow, they simply continue adding to the same allocation.
Once a product reaches that level of adoption, it becomes structurally sticky.
For advisers and their clients already holding these exposures, the question becomes straightforward:
Why switch?
If a new ETF offers only marginal improvements, such as slightly lower fees or small differences in portfolio construction, then there is little incentive to move. Transaction costs, potential tax implications and operational friction all reinforce the natural preference to remain with existing holdings.
In practice, new entrants are not simply competing for attention. They are competing against portfolio inertia ie. your strategy had better find a compelling argument they could sell to their grandmother for them to switch.
Distribution Matters More Than Launch Momentum
Another dynamic that is often underestimated is the scale of investment incumbents have made in distribution over many years.
New issuers sometimes become overly focused on day-one trading volumes, when the real work of building an ETF franchise happens over years of consistent distribution and client engagement.
Successful ETF issuers typically support their products through extensive infrastructure, including:
• adviser education
• marketing and investor content
• conferences and industry events
• deep platform relationships
• asset consultant relationships
• institutional engagement
The landscape in adviser land is also changing. Increasingly, investment decisions occur at the portfolio construction level, through model portfolios and managed account frameworks. Inclusion in these structures can significantly influence asset growth.
These efforts compound over time, building familiarity and trust across the investment ecosystem.
Without sustained investment in distribution, adviser engagement and market presence, even well-designed products can struggle to gain traction. The ETF industry tends to reward issuers that treat distribution as a long-term commitment rather than a launch event.
The Three Levels of ETF Market Liquidity
Liquidity is another area where the mechanics of ETFs are often misunderstood.
Many investors focus on visible trading volume on the exchange and assume this represents the true liquidity of a product. In reality, ETF liquidity operates across several layers.
The first layer is primary market liquidity, where authorised participants create or redeem ETF units in exchange for the underlying basket of securities. In practice this typically occurs in large blocks, often in the order of $250,000 to $500,000 or more, depending on the ETF. This means the ultimate liquidity of an ETF is anchored in the liquidity of its underlying holdings.
The second layer is market maker liquidity. Market makers provide continuous bid and offer prices, helping maintain tight spreads and facilitating trading throughout the day. The size and spread displayed on screen is typically the minimum agreed with the issuer. Investors or advisers looking to trade larger clips can often work through the issuer’s capital markets desk, which coordinates with market makers to source deeper liquidity in the market.
In practice, the spreads quoted by market makers are largely driven by the cost of hedging the underlying basket of securities.
The third layer is secondary market activity which is the natural buying and selling of ETF units between investors on the exchange.
While the first two layers provide the structural liquidity that allows ETFs to function efficiently, investors often focus on the third layer as a signal of product strength. Visible trading activity can influence investor confidence and attract further participation.
Early traction in ETFs rarely happens by accident. Initial seed capital, active market making and early investor participation often play an important role in establishing the trading activity that signals confidence to the broader market.
However, this is where many new entrants misunderstand how liquidity truly develops.
The strongest liquidity around new issuance typically comes from an established base of clients, investors who already trust the manager and are willing to support the strategy from day one. Those relationships are rarely built overnight. They are the result of years of consistent engagement within the client segment being targeted.
Without that foundation, early trading activity can take time to build.
This creates a reinforcing dynamic where products with established trading activity continue to attract flows, while newer funds may take longer to generate the visible momentum that investors often look for when assessing liquidity.
The Long Runway to Scale
Taken together, these dynamics mean that building a successful ETF franchise requires far more than simply launching a product.
You only need to look at the leaders in this space to see this in practice.
Product design matters. Investment philosophy matters. But scale in the ETF market is often driven by sustained engagement with the broader investment ecosystem.
New entrants who recognise this early and commit to long-term distribution, education and market presence are far more likely to succeed than those who treat an ETF launch as a short-term event.
The barriers to launching ETFs may have fallen.
The barriers to building a successful ETF business have not.
For those involved in launching or distributing ETFs, what do you think is the most underestimated factor when it comes to building scale in this market?