“ETF trading spikes when people think events are highly correlated and macro in nature,” he noted. “When stock pickers are having a tough time and market correlations rise, that’s when we see the ETF percentage of overall volume start to creep up.”
For example, trading volume in volatility-linked ETFs soared in Monday’s risk-off attack as investors looked for shelter and hedges. The CBOE Volatility Index has jumped 54% in a week. [Volatility ETF Trading Surges on Market Jitters, VIX]
“When the percentage of ETF trading in markets pops, a lot of it is people putting on trades to hedge bets. It’s not buy-and-hold,” Hempstead said.
“We saw this happen when the European debt crisis flared up, and during the Arab spring — when the market moves on headlines. Monday’s elections in Italy put European sovereign debt risk back on the table after people sort of forgot about it,” he pointed out.
“We had been in a lull. There was no big thing to point to in markets — it was business as usual and the normal rotation. So ETF trading dropped to between 20% and 25% of overall volume,” Hempstead added. “However, the next big triggers could be sequestration, then the debt ceiling. When the unknowns pop up that could have a major market impact, that’s when ETF volume spikes.”