BlackRock’s ETF unit iShares says the financial products “performed precisely as they are designed to do” during the recent market volatility triggered by worries the Federal Reserve could begin to withdraw monetary easing.
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 (NYSE: BLK), in an open letter to investors made public on Monday. “This rise in prominence has increased focus on how ETFs perform, particularly in stressed markets.”
Despite unsettled underlying markets, “ETFs in many cases performed better than ever in allowing investors to move quickly and efficiently in and out of investment exposures,” he wrote.
BlackRock and other ETF providers have responded to criticism the investment products, particularly bond funds, didn’t closely track the value of their underlying holdings during a recent sell-off. [ETF Providers Push Back Against Bond Fund Criticism]
ETF manager WisdomTree Investments (NasdaqGM: WETF) last week published a point-by-point response to negative media reports. [ETFs: People Fear What They Don’t Understand]
“To ensure more investors understand this underlying trend and how ETFs work, we are embarking on a fresh program for investor education,” wrote Wiedman at iShares.
“ETFs empower investors to buy and sell investment exposures immediately, throughout the trading day, at current market prices,” he said.
The iShares executive explained that ETFs are traded in two linked markets.
First, investors buy and sell ETF shares on stock exchanges. This is known as the secondary market.
Also, large blocks of ETF shares are traded between financial institutions known as authorized participants. This is known as the primary market “and it is how the price of the ETF and the underlying assets stay close to one another,” Wiedman said.
Next page: ‘Both markets have performed well’
“The point is, both markets have performed well,” Wiedman wrote in the investor letter. “Since May 22, when Federal Reserve announcements first sparked concerns in the markets about rising interest rates, many investors decided to sell a wide range of global financial assets. Many of these investors turned to ETFs to execute their investment views. Even where the underlying markets were thinly traded (like some kinds of bonds) or closed during New York trading hours (as with many international equities), ETFs enabled investors to move quickly and efficiently to execute their views.”
He said the volatile markets the last few weeks have spotlighted an important trend in the business.
“More and more ETFs are becoming the true market, particularly when market sentiment shifts fast. ETFs are increasingly becoming the place where investors of all sizes can see the market price for a given investment exposure, and act on what’s really happening now in the markets,” Wiedman concluded. “In a rapidly moving market, the reported prices of individual underlying assets may become stale. The ETF price can become the true price for that market, and the underlying assets may eventually catch up with any gap between the two (called a ‘premium’ or ‘discount’). This is a main reason that so many investors large and small opted to use ETFs during the last month’s volatility.” [ETFs Face Scrutiny Amid Market Turbulence]
Still, some financial advisors are worried that investors may not understand when or why ETFs may trade at discounts to net asset value, Bloomberg reported Monday. [ETFs Reverse Inflow Trend]
The ETF business should cooperate to boost investor education efforts, Rick Ferri, founder of Portfolio Solutions, told Bloomberg.
““There hasn’t been any real attempt by the industry to get together on this, and there’s been no pressure from the SEC or Finra to make it happen,” he said.