News & analysis COVID CRASH PUTS PASSIVES TO THE TEST


Mona Dohle looks at how ETFs are performing during the health crisis.


With the dust settling on the financial market stampede in the first quarter, ETFs appear to have surprised their critics. Some have warned that ETFs, which have seen exponential growth since the 2008 financial crisis and are now home to more than $9trn (£6.9trn) of assets, has created an illusion of liquidity, with the fund vehicles being more easily tradable than their underlying assets. This in turn could accelerate vol- atility in the event of a crisis.


This argument was put to the test in the first round of the Covid crash and ETFs appear to have performed well. In line with the overall market, ETFs booked sharp out-flows in March, with 80% of funds trading at a record discounts. But passives responded to central bank interventions much more swiftly. Throughout the crisis ETFs traded at double the volume they did in 2019, and as the US Federal Reserve announced the first round of a $500bn (£388.8bn) short-term loan initiative in mid-March, trad-


The role of authorised participants in providing ETF liquidity has previously come under fire from the regulator due to a lack of transparency on the total number of authorised participants in the market. Based on high secondary market trading vol- umes, the Investment Association concluded that the network structure of authorised participants has held up well and helped to maintain overall liquidity levels.


Bruised not beaten


Bond ETFs did indeed trade at a sharp discount in mid-March, a challenge which was only overcome by large scale central bank interventions.


ing levels of passive funds rose to nine times their average level, a report by the Investment Association shows. While trading in primary markets almost came to a halt, the buying and selling of passive vehicles on secondary markets reached unprecedented highs. “ETFs have provided a source of liquidity and price discovery when underlying market trading was impaired,” the UK fund industry body concluded.


European ETF Industry Assets Under Management 1000000 800000 600000 400000 200000 0


Jul 19


Aug 19


Sept 19


Nov 19


Dec 19


Jan 20


Month End Data - All values in million EUR 6 | portfolio institutional August 2020 | issue 95


Feb 20


Mar 20


Apr 20


May 20


Jun 20


Source: Refinitiv Lipper


The rise in ETF trading volumes was also noted in the Bank of England’s May 2020 Interim Financial Stability Report. “During the period of market stress in March, unlike in some previous stress events, investors may have found it easier to trade ETF shares than the underlying assets held by the ETF, and trading volumes in ETF shares rose significantly,” the cen- tral bank noted. Fund flow data suggests that the ETF industry emerges from the market upheaval in the first quarter bruised but not beaten. In the first half of 2020, the industry booked €17.4bn (£15.8bn) in net inflows, largely driven by growing demand for bond ETFs (€16.4bn/£14.9bn) as investors attempt to hoard liquidity. A slowdown in demand for equity


funds and a sharp decline in the value of the underlying assets meant that the European ETF industry’s assets under manage- ment shrunk to €830bn (£755.8bn) by the end of June, a €40bn (£36.4bn) drop year to date, according to Lipper data. Overall, European ETF’s booked €17bn (£15.4bn) in inflows, a sharp reduction on the €106.7bn (£97.1bn) they reported in 2019.


Early doors


Does all this mean that the concerns about the pro-cyclical nature of ETFs were misplaced? The Bank of England sketches a more cautious picture. Individual investors in ETFs and open- ended funds replicating their allocation may have benefited from a first-mover advantage, the report concludes, but passives remained more sensitive to asset price moves, particularly if the underlying assets are less liquid, the Bank of England warned. Bond ETFs did indeed trade at a sharp discount in mid-March, a challenge which was only overcome by large scale central bank interventions, the Bank of England stresses. “The magnitude of the sudden demand for cash could not be fully met by the private sector alone,” it warns, suggesting that the ability of ETFs to perform in times of stress is dependent on central banks stepping in infinitely as a buyer of last resort.


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48