Recent questions about ETF liquidity and how the financial products behave in volatile markets show that the industry needs to reach out more on educating investors and financial advisors.
For example, nearly two-thirds of ETF firms said the lack of understanding on liquidity is a major challenge to the continued growth of ETFs, Investment News reports, citing a survey from Cerulli Associates.
The liquidity of an ETF isn’t based solely on the fund’s trading volume. It also depends on the liquidity of the underlying asset class.
The recent turmoil in bond markets on Federal Reserve tapering speculation has also put the spotlight on ETF premiums and discounts, or when the funds trade away from net asset value. [About Those Bond ETF ‘Discounts’]
“Market volatility can have an impact on all investment products, but in this case many investors seemed to question why an ETF’s market price deviated from its stated net asset value,” says Jim Rowley, senior investment analyst in Vanguard Investment Strategy Group. [Vanguard: ETF Premiums, Discounts and Volatility]
Although ETFs held up relatively well in unsettled markets, the recent volatility has led to some misunderstandings about the funds’ inner workings. The ETF business should do more on education.
In fact, BlackRock’s iShares recently said it is launching a new education program to ensure more investors understand how ETFs work.
The role of ETFs “continues to grow in the global capital markets as investors seek efficient, tailored access to different investment exposures,” said Mark Wiedman, global head of iShares at BlackRock, in an open letter to investors. “This rise in prominence has increased focus on how ETFs perform, particularly in stressed markets.” [ETFs Performed Well in Stressed Market: iShares]
During BlackRock’s second-quarter earnings call Thursday, Wiedman said the recent scrutiny of ETFs has shown “we have a lot more work to do in educating clients and other stakeholders about how these vehicles behave [and]what does the current market price actually represent.”