Are ETFs Vulnerable in Periods of Sharp Market Volatility?

“This research is underpinned by two assumptions that don’t reflect the historic behavior of investors or ETFs,” the firm told Bloomberg. “To assume that all investors behave the same way in times of market stress is not grounded in reality. Additionally, we have repeatedly seen ETF volumes grow dramatically during times of stress as investors utilize them as a tool for price discovery.”

For instance, BlackRock pointed to its Turkey ETF, iShares MSCI Turkey ETF (NasdaqGM: TUR), as a recent example. The ETF’s underlying index plunged 16% on August 10 but trading remained orderly with no outsized impact on underlying shares.

“TUR saw its highest amount of daily trading volume ever, with 13.3 million shares exchanging hands that day, compared to its previous average daily volume of 500K shares,” BlackRock said.

Societe Generale’s findings on ETF liquidity issues are not all negative. The bank found that around 90% of the world’s equities aren’t likely subject to a liquidity squeeze since less than 10% of the company stocks are owned by ETFs.

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