Many skeptics have warned that exchange traded funds would buckle under immense pressure during a highly volatile sell-off, but the coronavirus pandemic-induced selling this year only revealed how resilient and reliable ETFs have been during periods of heightened trading activity.
The Covid-19 “crisis provided the largest ever stress test for ETF markets,” Marko Kolanovic, head of quantitative strategy at JPMorgan, said in JPMorgan’s annual review of the industry. “Other than a few glitches, ETF markets generally functioned as intended and held up well in this stressful environment.”
After a swift a violent sell-off earlier this year in response to the coronavirus pandemic, equity and bond ETFs have arguably come out with an improved track record, with only a couple of commodity-linked funds leaving some blemishes on the industry, the Financial Times reports.
“Any time you see ETFs go through stressed markets you get to see where the stretched seams are and where they might burst,” Ben Johnson, head of ETF research at Morningstar, told the FT. Overall, the postmortem was positive, he added. “The broader ecosystem didn’t break despite a torrent of trading volumes.”
Investors have funneled billions into the ETF market, despite some arguing that actively managed mutual funds should have benefited from the expertise of managers who are better capable of weaving in and out of markets. According to EPFR data, traditional actively managed equity funds suffered another $143 billion of withdrawals this year while equity ETFs have attracted another $111 billion in inflows.
The bond market also reflected a similar trend. Bond funds have had net investor outflows of nearly $9 billion this year, whereas bond ETFs have enjoyed net inflows of $150 billion.
“We believe the resiliency of the ETF ecosystem amid significant market strain in March 2020 underscores its robustness,” Alexander Blostein, an analyst at Goldman Sachs, said in a note, adding that this “proof of concept” should attract more first-time buyers to ETFs.
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