The coronavirus outbreak is in the beginning a well being disaster, however it has additionally led to unprecedented volatility in monetary markets throughout the globe.
So what function have exchange-traded funds (ETFs) performed within the tumult?
Amid the best market turbulence in over a decade, ETFs have been a supply of stability. And never for the primary time.
ETFs efficiently navigated the 2008 world monetary disaster, the 2013 taper tantrum, the 2015 high-yield bond sell-off, and now the present coronavirus-driven market stresses.
Two factors about ETF buying and selling throughout probably the most unstable interval, from 24 February to 27 March 2020, are price remembering: First, many traders turned to ETFs to regulate positions and handle danger of their portfolios; and second, fixed-income ETFs served as an indispensable price-discovery mechanism, reflecting real-time costs when bond market liquidity was challenged.
File Buying and selling Volumes within the Face of Heightened Volatility
In previous careworn market eventualities, ETF buying and selling exercise tended to extend when market volatility rose. This held true in the course of the 24 February to 27 March interval.
Some knowledge from that interval are price highlighting:1
- US-listed ETFs traded nearly $6.4 trillion. By comparability, single-stock buying and selling measured nearly $11 trillion. So ETFs accounted for 37% of all fairness buying and selling. In 2019, they accounted for 27%.
- US-listed ETFs traded nearly $256 billion per day on common, roughly thrice their common 2019 day by day buying and selling quantity.
- Through the week of 9 March, ETF buying and selling volumes in the US surged to a report $1.4 trillion.
Traders have turned to ETFs in the course of the present market stress for good motive: They’ve been environment friendly and efficient instruments for rebalancing holdings, hedging portfolios, and managing danger.
ETFs as a Proportion of Fairness Buying and selling vs. VIX
Mounted-income ETFs replicate real-time market costs.
ETF liquidity was essential within the bond markets final month. Whereas particular person bonds commerce in an opaque over-the-counter (OTC) market, fixed-income ETFs commerce on-exchange, like equities. This ease of entry means shares of fixed-income ETFs typically commerce extra usually than their underlying bonds, even in calm markets.
For instance, fewer than 1% of the greater than 21,000 publicly registered company bonds commerce day by day within the OTC market.2 On 12 March, a day of extreme market dislocation, the iShares® iBoxx $ Funding Grade Company Bond ETF (LQD) traded nearly 90,000 instances on-exchange, whereas its prime 5 holdings traded 37 instances every on common.3
Due to this liquidity, fixed-income ETF costs incorporate extra real-time info than even their most closely traded portfolio bonds, demonstrating the place there may be an actionable value for the whole portfolio. This reveals the facility of ETFs as value discovery instruments, significantly when markets are transferring shortly.
This dynamic performed out when bond market liquidity was underneath duress in the course of the week of 9 March. Mounted-income ETFs traded at costs under their web asset worth (NAV). The NAV is an estimate of the truthful worth of the underlying holdings, based mostly on precise trades of portfolio bonds, estimates derived from trades of bonds from the identical issuer or sector, or different market metrics. The ETF value reveals what traders are really prepared to pay.
In different phrases, these reductions acted as “main indicators” for underlying bond costs.
Worth of LQD vs. High Holdings, 19 February 2020 to 23 March 2020
|Identify||Weight in LQD|
|GE Capital Worldwide Funding (GE)||0.35%|
|Anheuser-Busch Corporations Llc (ABIBB)||0.31%|
|CVS Well being Corp (CVS)||0.31%|
|Verizon Communications Inc (VZ)||0.22%|
|Goldman Sachs Group Inc. (GS)||0.21%|
As of 23 March 2020. Holdings topic to alter. For the newest fund holdings, go to iShares.com. Data on non-iShares Fund securities is offered strictly for illustrative functions and shouldn’t be deemed a proposal to promote or a solicitation of a proposal to purchase shares of any safety aside from the iShares Funds, which can be described on this materials.
A typical critique of ETFs, fixed-income ETFs specifically, is that they haven’t been examined in a careworn market atmosphere. However within the current careworn market atmosphere, fixed-income ETFs offered readability in an in any other case opaque section of the market. At a difficult time for bond market liquidity, traders might acquire (and promote) publicity by buying and selling ETFs on-exchange.
Within the worst volatility because the world monetary disaster, traders seemed to ETFs to switch danger and allocate capital. In all environments, ETFs have carried out as designed and offered entry, liquidity, and transparency to the market.
ETFs have been examined time and time once more. And every time, they’ve handed the take a look at.
1. Bloomberg, BlackRock for the interval 24 February 2020–27 March 2020.
2. Citigroup, “The approaching revolution in credit score portfolio buying and selling” (November 2019)
3. BlackRock, TRACE (as of 12 March 2020)
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All posts are the opinion of the writer. As such, they shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially replicate the views of CFA Institute or the writer’s employer.
Picture credit score: ©Getty Pictures / Julian Dewert