ETFs have become an increasingly important part of the infrastructure connecting Hong Kong, Mainland China and international capital markets. That role continues to expand.
In the first seven months of 2026, average daily turnover in ETFs through Northbound Stock Connect reached RMB5.1bn, while Southbound ETF turnover reached HK$5.8bn. Both were around 50 per cent higher than their respective averages for 2025. The number of ETFs eligible through the two channels has also grown substantially since ETFs were first included in Stock Connect in 2022.
For investors, greater choice and trading activity are welcome developments. Yet the growth of ETFs also makes it increasingly important to understand what sits behind the liquidity visible on an exchange. A price on a screen may look straightforward, but the market structure supporting it is considerably more complex.
ETF liquidity has more than one layer
An ETF’s average daily trading volume is useful information, but it does not provide a complete picture of how easily an institutional investor might establish or exit a position.
Part of an ETF’s liquidity comes from investors trading existing shares with each other on the secondary market. Market makers provide another layer, quoting prices and facilitating transactions, while the liquidity of the securities represented by the ETF sits behind both.
An ETF with relatively modest trading volume, for example, may provide access to highly liquid underlying securities. Professional liquidity providers may therefore be capable of facilitating a transaction considerably larger than the volume immediately visible on screen.
Conversely, high trading volumes in an ETF do not remove the liquidity characteristics of its underlying investments, particularly during periods of market stress. For institutions dealing in size, the distinction between visible liquidity and executable liquidity can therefore matter.
What connects the ETF with its underlying market?
The link between screen liquidity and the underlying portfolio is partly maintained through the creation and redemption process.
Authorised participants can create or redeem ETF shares through transactions involving baskets of underlying securities, cash or a combination of the two, depending on the fund’s structure. Alongside arbitrage activity, this mechanism helps connect the price of an ETF with the value of its underlying portfolio.
Market makers consequently consider more than an ETF’s recent trading volume when determining the prices and quantities at which they are prepared to transact. Underlying liquidity, hedging costs, volatility and prevailing market conditions can all enter the calculation.
An ETF can therefore sometimes provide meaningful liquidity even when relatively few of its own shares have recently changed hands. Liquidity is not simply a characteristic of the fund itself; it is partly a product of the market structure operating behind it.
Hong Kong adds a cross-border dimension
Hong Kong provides a particularly interesting example because ETF Connect increasingly brings together Mainland and international pools of capital.
By the end of June 2026, investors could access 396 eligible ETFs across the Northbound and Southbound channels, compared with 87 when ETFs were first added to Stock Connect in July 2022. Participation has also broadened to include mutual funds, funds-of-funds, wealth-management platforms and institutional investors.
For professional investors, greater cross-border access can introduce additional considerations. Across Asia-Pacific, markets operate in different currencies, time zones and trading sessions, while the liquidity profiles of underlying securities can vary substantially.
Where an ETF provides exposure to securities in another market, there may be periods when the ETF is trading while parts of its underlying portfolio are not. For liquidity providers, determining an appropriate price may require assessing available market information, related instruments, and the cost and availability of hedges when parts of the portfolio are not trading.
For an institutional investor, the timing and manner of execution can therefore be significant.
Stress can reveal where price discovery is taking place
Periods of volatility can expose another important distinction between an ETF and its underlying portfolio.
Bond ETFs provide a useful example. Individual corporate bonds may trade relatively infrequently, whereas an ETF holding them can continue to change hands throughout the trading day. If the ETF subsequently trades below its reported net asset value, the immediate conclusion might be that it has become mispriced.
However, where underlying securities have not traded recently, their recorded prices may not fully reflect current market conditions. The ETF’s live market price may sometimes incorporate new information more quickly, effectively contributing to price discovery.
For professional investors, understanding which market is providing the most current information can therefore be as important as observing the apparent discount or premium itself.
The screen price is only the starting point
Hong Kong’s growing ETF ecosystem is increasing the range of exposures available to Mainland and international investors. Greater access, however, does not make the mechanics of liquidity less important.
For a sizeable institutional transaction, yesterday’s turnover or the current bid-offer spread provides only part of the information required. Market depth, order size, underlying liquidity, volatility, trading hours, currencies and the availability of hedges can all affect execution.
As ETFs become a more important part of the infrastructure connecting Asian and international capital markets, understanding where their liquidity comes from is increasingly important.
The price on the screen tells investors where a market is. Understanding the underlying structure can help reveal how much business can actually be done there.