The recent sell-off that pushed U.S. equity markets into a correction served as a stress test for the ETF ecosystem, revealing the relatively stable and liquid nature of the ETF investment vehicle even in more volatile market conditions.
In the week ended February 9, 2018, “exchange traded funds (ETFs) experienced more than $1 trillion in US-listed exchange trading volume, roughly double normal trading volumes (Source: Bloomberg). While much of the media attention focused on losses in certain complex exchange-traded products (that are not ETFs), this episode underscored stability and liquidity of ETF trading amidst historic trading volumes. In fact, BlackRock observed some of the highest on-exchange volumes ever in its US-listed ETFs during this period,” BlackRock analysts, led by Barbara Novick, said in a note.
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ETFs have quickly gained popularity among the investment community as a means of easily and efficiently tracking broad market exposures. The investment vehicle also remains relatively new. Consequently, some naysayers have been quick to point out that the investment tool is largely untested during extreme bouts of volatility. However, the recent market oscillations and how ETFs performed during the swings revealed that the investment vehicle can hold up.
“Not only was ETF trading orderly, an upswing in trading volume showed that investors again turned to ETFs in times of turbulence. Importantly, even with heavy trading of ETF shares on exchange, the funds experienced minimal outflows. In other words, buys and sells on exchange largely cancelled each other out, with the outflows representing minimal demand imbalance. In effect, ETFs acted as ‘shock-absorbers’ in choppy markets,” the BlackRock analysts said.
BlackRock found minimal outflows of ETFs, or $30 billion in net ETF outflows compared to $1 trillion in ETF exchange trading over the week ended February 9. ETFs made up 3.86% of the overall U.S. equity trading volume during the period, compared to an average of 4.32% in the 12 months prior.
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Furthermore, despite the severe market volatility and elevated trading volumes, ETFs still traded with tight bid-ask spreads, heavy volumes and high liquidity.
“Elevated trading volumes show that investors used ETFs to adjust positions in a fast-changing market. Widely owned ETFs maintained tight bid-ask spreads throughout the turmoil. Meanwhile, evidence shows that heavy trading volumes in both stock and bond ETFs took place efficiently,” the analysts added.
For more information on the ETF industry, visit our ETF performance reports category.