CIO Praises ETF Structure Amid Heavy Volatility | ETF Trends

“Built Ford tough” is the familiar moniker for automaker Ford’s trucks and in the current hailstorm of market volatility, it’s exchange-traded funds (ETFs) that have been weathering the storm thus far as an investment vehicle. “Built ETF tough” could be circulating through the capital markets once the coronavirus effects boil over.

“This has actually been a great victory for ETFs as a structure. Everybody’s been concerned in the mainstream media that a big volatility spike like this would unravel some part of the market we didn’t understand. In fact, the opposite has happened,” said Dave Nadig, chief investment officer and director of research at ETF Trends. “ETFs have delivered like champs here. We’ve had no major breaks. Even with the circuit breaker hit [Monday], the reopen off that circuit breaker was, frankly, flawless.”

With bonds as being the safe haven default, particularly in this frenzied market, fixed income ETFs have also helped to bring stability. With the ability to get bond exposure without purchasing the actual debt issues themselves, investors’ flight to safety is accelerated.

“What we’re seeing in this high-velocity market, as in past fixed income-stressed markets, the bond market is better with fixed income ETFs in it than it was without. Fixed income ETFs provide support to the bond market,” said Samara Cohen, co-head of iShares Markets and Investments. “It’s a place for investors to exchange risk, and … it was balanced trading.”

^VXD Chart

^VXD data by YCharts

One of the more liquid bond funds ETF investors can look to for core exposure is the iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG).

Fund facts:

  • AGG seeks to track the investment results of the Bloomberg Barclays U.S. Aggregate Bond Index.
  • The index measures the performance of the total U.S. investment-grade bond market.
  • The fund generally invests at least 90% of its net assets in component securities of its underlying index and in investments that have economic characteristics that are substantially identical to the economic characteristics of the component securities of its underlying index.

Cohen and Nadig also agreed that ETFs could serve as an accurate price predictor. For example, the iShares Core S&P 500 ETF (NYSEArca: IVV), which tracks the benchmark S&P 500 Index, was able to hint that the circuit breaker would be tripped ahead of the raucous market opens last week.

“We were able to see where S&P ETFs were trading,” Cohen said. “We were also able to see where European-listed ETFs were trading that reference U.S. markets, and that gave us a pretty good indication going into the U.S. open that we were likely to see a marketwide circuit breaker.”

For more market trends, visit ETF Trends.