ETFs pass the pandemic stress test

The IA has today published its latest research paper on Exchange Traded Funds (ETFs)  that seeks to explore in detail the performance and resilience of these funds during coronavirus. 

A type of investment fund which, unlike many open-ended funds, are listed on one or multiple global stock exchanges, since their introduction 25 years ago ETFs have grown to total over $7 trillion assets under management (AUM).

Some stakeholders have at times questioned whether the ETF structure would hold up in times of market stress. Our initial paper published in June demonstrated that, despite the unprecedented market volatility seen following the outbreak of coronavirus, ETFs proved resilient and in fact provided a key source of liquidity and price discovery to investors. 

This paper was well-received by policy makers, regulators, and other stakeholders, and formed part of a larger conversation on ETF resilience during periods of market stress. As part of this conversation, additional areas were raised as worthy of further exploration. 

One question raised was how well ETF primary and secondary market mechanisms – in other words, the means by which ETF shares were created, redeemed, and traded – functioned during the peak periods of market volatility. 

In particular, regulators were concerned about key market participants – most notably Authorised Participants (APs) who provide the channel for investors to create and redeem ETF shares – “stepping away” from ETF markets during periods of crisis. 

In addition, some stakeholders wondered whether apparently strong ETF performance had been reliant on significant central bank intervention.

As a result, today we are publishing an expanded analysis of ETFs which explores these questions in detail as well as expanding on previous analyses of ETF liquidity. 

As well as providing additional data further demonstrating the value of ETFs as a source of liquidity and price discovery, the paper also demonstrates that there was in fact no evidence of APs, or indeed other vital market participants, “stepping away” from ETFs.

Furthermore, ETF performance does not appear to have been reliant on central bank intervention, and ETFs in fact proved valuable to the US Federal Reserve’s efforts to stabilise broader fixed income markets.

ETFs are just one tool in an investor’s toolkit, and it is right that investors, as well as policy makers and regulators, continue to ask questions and analyse potential risks to the investment ecosystem. Nonetheless, we hope that this paper helps to assuage some concerns about this fund structure. 

To read the full paper: click here