The coronavirus outbreak is at the start a well being disaster, nevertheless 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 international 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 essentially the most risky interval, from 24 February to 27 March 2020, are value remembering: First, many buyers turned to ETFs to regulate positions and handle threat 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 harassed 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 value 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.
- In the course of the week of 9 March, ETF buying and selling volumes in the US surged to a document $1.4 trillion.
Traders have turned to ETFs in the course of the present market stress for good purpose: They’ve been environment friendly and efficient instruments for rebalancing holdings, hedging portfolios, and managing threat.
ETFs as a Proportion of Fairness Buying and selling vs. VIX
Fastened-income ETFs mirror 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 occasions on-exchange, whereas its prime 5 holdings traded 37 occasions every on common.3
Due to this liquidity, fixed-income ETF costs incorporate extra real-time data than even their most closely traded portfolio bonds, demonstrating the place there’s an actionable value for the complete portfolio. This exhibits the ability of ETFs as price discovery tools, significantly when markets are transferring shortly.
This dynamic performed out when bond market liquidity was below duress in the course of the week of 9 March. Fastened-income ETFs traded at costs beneath 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 exhibits what buyers are truly keen to pay.
In different phrases, these reductions acted as “main indicators” for underlying bond costs.
Worth of LQD vs. Prime Holdings, 19 February 2020 to 23 March 2020
|Identify||Weight in LQD|
|GE Capital Worldwide Funding (GE)||0.35%|
|Anheuser-Busch Firms 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 vary. For the latest fund holdings, go to iShares.com. Data on non-iShares Fund securities is offered strictly for illustrative functions and shouldn’t be deemed a suggestion to promote or a solicitation of a suggestion to purchase shares of any safety apart from the iShares Funds, which can be described on this materials.
A typical critique of ETFs, fixed-income ETFs particularly, is that they haven’t been examined in a harassed market setting. However within the current harassed market setting, fixed-income ETFs offered readability in an in any other case opaque section of the market. At a difficult time for bond market liquidity, buyers may achieve (and promote) publicity by buying and selling ETFs on-exchange.
Within the worst volatility because the international monetary disaster, buyers regarded to ETFs to switch threat 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 check.
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 mirror the views of CFA Institute or the writer’s employer.
Picture credit score: ©Getty Photos / Julian Dewert