The explosion in ETF trading volumes seen in early August when volatility hit the global markets acts, to some extent, as proof that these instruments are as liquid as the industry has always claimed. This may come as a surprise to those who have recently scrutinised ETFs.
One accusation hurled at ETFs by regulators and the press alike is that in the event of a market disruption, they might not trade as readily as they should.
This concern has been particularly prominent in relation to emerging markets ETFs, where the markets themselves may be less liquid. It has, however, also been used as a criticism of securities lending.
The FSB’s recent report into ETFs stated: “In addition, [securities lending] could make the liquidity position of the ETF fragile, by challenging the ability of ETF providers to meet unexpected liquidity demands from investors, particularly if outflows from ETFs become significant under severe stress.” (For an in depth look at securities lending see the lead feature here.)
At the opposite end of the scale, because they are growing so rapidly and trade so readily, some are concerned that ETFs could cause distortions in price. The IMF’s April report stated that “the recent increase in commodity price volatility has been partly attributed to the strong flows into commodities-based funds, particularly gold ETFs.”
In early August when volatility across markets hit levels which many compared to those in 2008, ETF turnover volumes in Europe increased as much as 300%, according to Cowen. US and Asian ETFs also saw spikes in trading. Rather than coming unstuck, ETF shares were created and redeemed and nothing blew up; granted a lot of the redemptions were in developed market ETFs, which are the most liquid.
There were also inflows into gold products pushing assets in the SPDR Gold ETF up until it became the world’s largest ETF for a short time.
Although the gold price did hit a high before falling again, no one has thus far suggested ETFs/ETPs are to blame. In fact, in a recent investor alert the US’ regulatory authority, Finra upheld gold ETFs as a way to “help spread out and potentially lower your risk”.
The ease with which ETFs weathered the recent market moves shouldn’t come as a surprise; in 2008 ETFs made it through and have since increased in popularity as investors have noted the benefits of having an instrument they could get in and out of as they wished, particularly handy in turbulent times.
This month ETFM has had a re-shuffle. We still have all the same features but for comment, see the pages after the BlackRock stats and for the profile go to the back of the magazine, after the Morningstar stats.
Clare Dickinson, Editor
All-day event on 24 April
Consequences could be more severe than in stress tests
AFH has six segregated mandate funds
Variable operating expenses