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,...
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