It’s a ‘hide-under-the-mattress’ market. How are ETFs managing?
As financial markets convulsed lower over the past week, flows into and out of exchange-traded funds help shed a light on what investors are thinking.
“This has become a hide-under-the-mattresses environment,” said Todd Rosenbluth, head of ETF and mutual fund research at CFRA. “Investors are using the benefits of liquidity and commission-free trading that ETFs offer as a safe haven. The safest of assets, U.S. Treasuries, is garnering strong interest.”
CFRA data for the bumpy past week show that it’s not just any Treasurys investors are snatching up. Rather, they’re prioritizing shorter-term paper. The SPDR Bloomberg Barclays 1-3 Month T-Bill ETF
and the iShares U.S. Treasury Bond Fund lost $1.5 billion.
Investors also fled emerging markets funds. “Emerging market ETFs are highly exposed to sentiment for global economic growth, and the pandemic has negatively impacted demand,” Rosenbluth noted. “They also have high exposure to China, where the coronavirus first had an impact.”
For Rosenbluth and other ETF insiders, the volatility of the past week has been a vindication. Market commentators have spent the past several years warning of the potential dangers lurking in passively-managed funds. If investors flee for the exits all at once, the doors could get blocked, the thinking has gone — and the all-day tradeability of ETFs just amplifies that concern.
, which closed about 5% lower than the stated value of its holdings. That means anyone who tried to sell LQD on Thursday received about 95% of what they might have expected.
As previously reported, one way to avoid an outcome like this is to trade ETFs using limit orders, which allow the investor to specify the values at which they want their trades to be executed. By Friday, though, that differential had shrunk to a fraction of the Thursday gap, Rosenbluth noted.
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