Based on the recent bout of volatility last week, State Street reached out to advisors to help explain what happened in the market and exchange traded funds.
Via conference call, David Mazza, Head of Research for SPDR ETFs and SSGA Funds, led a discussion on what occurred last week during the market correction and potential opportunities ahead.
To start off, David LaValle, US Head of ETF Capital Markets at State Street Global Advisors, explained how the nuances of different exchange structures impacted trading. While the Nasdaq and NYSE Arca where ETFs are listed are automated to open on 9:30am, NYSE has rules that delayed the opening in volatile market situations, which turned off automated market structure and went manual to discover prices. Additionally, due to the sudden volatility, a number of securities experienced trading halts. [What Happened with ETFs on Monday’s Mini ‘Flash Crash’]
Consequently, the “price discovery process was delayed,” LaValle explained, which contributed to the so-called mini flash crash that some ETFs experienced.
“In instances of extreme volatility, instances where there is a delay in market makers’ ability to gather data for individual components of an etf, it makes it difficult to calculate fair value of an ETF,” LaValle added. “Delayed opening and halts contributed to ability of market makers who could calculate fair value.”
Nevertheless, ETF traders may follow some best practices to help keep better control over trades. For instance, LaValle strongly advocates the use of limit orders and discourages market orders.
“While limit orders does not guarantee execution, it does give greater control,” LaValle said.
The market correction also created opportunities. Markets typically under or over react in short-term on headlines, Michael Arone, Chief Investment Strategist & Intermediary Business Group at State Street Global Advisors, said. Additionally, given the global accommodative policies, low interest rate environment and high corporate profitability, Arone argues that it is a reasonable assumption that stock prices could recover.
Consequently, the strategist has a positive view on cyclical sectors, along with long-term position on global diversification. However, he did warn of short-term volatility, especially as we hear central banks tinker with their policies, such as China, the U.S. and Japan.
Investors should select “among sectors and industries that are cyclical benefit from growing U.S. economy,” Arone advised, including consumer discretionary, health care, financial, technology, and sub-sectors like homebuilders, pharmaceuticals, biotechnology, health equipment and regional banks.
ETF investors can track these sector picks through a range of SPDR ETFs, including the Consumer Discretionary Select Sector SPDR (NYSEArca: XLY), Technology Select Sector SPDR (NYSEArca: XLK), Financial Select Sector SPDR (NYSEArca: XLF), Health Care Select Sector SPDR (NYSEArca: XLV), SPDR S&P Homebuilders ETF (NYSEArca: XHB), SPDR Pharmaceuticals ETF (NYSEArca: XPH), SPDR S&P Biotech ETF (NYSEArca: XBI), SPDR S&P Health Care Services ETF (NYSEArca: XHS) and SPDR S&P Regional Banking ETF (NYSEArca: KRE).
Gauging investment sentiment, Arone found that “folks seem to be, at least what financial advisors explain, fairly calm” as we witness a normal market correction in a longer upward trend in stock prices.
“Our expectation is that this is not the onset of another 2008 or a bear market,” Arone said.
For more information on the market, visit our current affairs category.
Max Chen contributed to this article.