The $5 trillion ETF market has been tested

There is nothing like a market induced shake-up. This past week reminded me of all the trading floor jargon of my Salomon Brothers days on the 37th floor of 7WTC.

`Bleeding`

`Catching falling knives`

`Close the book`

It also reminded me of the Betterment/Brexit incident in July 2016! When the unexpected election results hit the market, ETFs became illiquid and mispriced. Betterment suspended trading for retail on that Friday of the Brexit results for almost 3 hours. Read more details here.

ETFs are the bread and butter of all robo-advisors. Both standalone fintechs and incumbents use these efficient wrappers to create their portfolios.

Today I take a look at how the ETF market fared during last week`s sizable downturn.

Eric Balchunas, was reported that history was made on Feb 28th, with the $SPY ETF becoming the first security to ever trade in one single day, over $100billion!

Screen Shot 2020-03-02 at 08.26.02

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019. 

You get 3 free articles on Daily Fintech. Get all our fresh content and our archives and participate in our forum, by becoming a member for just US$143 a year.

Several large ETFs made all-time volume records on that same day. For example, $QQQ the NASDAQ tracker reached $28billion and $HYG, the most widely used high-yield bond ETF, reached $7.8billion daily volume.

Overall, the ETF market fared very well in this market blood bath.

The record volumes are a healthy sign. ETFs are used by professionals to get in and out of the market fast and efficiently. I say that the record volumes are a healthy sign, because they were combined with tight spreads and reasonable premium-discount levels; unlike the situation that occurred in the summer of 2016.

Authorized participants (APs) that manage the liquidity and play a significant role in the bid-ask spreads in ETFs, worked wonders in this recent market turmoil. In my 2016 post, I discuss in detail the liquidity risks inherent in ETFs. The bottom line is that the business of APs for ETF, is an operationally intensive business. The APs create and redeem ETF shares and on average each ETF has 5 active APs. These are typically large US banks but also European banks are involved in the large US ETF market as APs.

We need to celebrate the way in which these entities handled the total record volume of ETFs this past week. $1.2 trillion traded in ETFs! Bank of America, Goldman Sachs, JP Morgan, and ABN AMRO, are some of the major AP players that make it possible for robo-advisors to brag about serving smoothly end customers.

ETFs proved themselves in this downturn that goes down in history as one of the most severe drops in a short time. It has been compared to the 2008 crisis, as it wiped out close to $5 trillion in value in public stock markets.

ETFs overall experienced $24billion of net outflows! This is peanuts compared to the overall drop in equity values. This shows that that retail ETF holders, HODLed; the high ETF volumes indicate that professionals used ETFs to manage their exposures.

Sources

 

Start the conversation at Daily Fintech Conversations

2 comments

  1. […] Tuesday Efi Pylarinou @efipm our Swiss-based Fintech Adviser,  founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019 wrote The $5 trillion ETF market has been tested […]

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.