Liquidity in ETFs continues to stand up during times of market stress

Jul 1st, 2016 | By | Category: ETF and Index News

The reaction of the financial markets to the EU Referendum result last week has highlighted one of the main benefits of exchange-traded funds – liquidity. Following the FTSE 100’s volatile reaction to the news on Friday 24th – it dropped 8% in the morning but closed at only 2.5% lower following the vote – investors spent the day using ETFs to express views and manage volatility during the market stress.

Adriano Pace, managing director, head of equity derivatives at Tradeweb

Adriano Pace, managing director, head of equity derivatives at Tradeweb

Trading on electronic ETF platform Tradeweb soared on 24th June following the ‘leave’ results as investors quickly cashed in on falling markets and bought safe haven assets in a bid to protect themselves from volatility.

The notional amount of trades was €1.35bn on Friday, 2.5x higher than the average trading average daily notional of €500-550 million.

Data from the platform showed that investors piled into gold and silver exchange-traded products (ETPs) and equity ETFs on the biggest day for trades the platform has seen. Stand out asset classes were commodities, which made up 16% of all trading with 80-90% being purchase orders for gold and silver ETPs.

Adriano Pace, managing director, equity derivatives at Tradeweb, said: “Investors moved into gold and silver as a way to de-risk from the markets. This is a trend we saw continue into this week as well.”

Investors continued to buy gold and silver ETPs this week despite the price of the precious metals rising. Pace said: “It’s likely that some investors have no exposure to these safe havens and are now incorporating them into their investment.”

Equities normally make up 60-65% of trading on the Tradeweb platform and this pattern remained strong on the Friday. The only equity category to be a net seller was Japan, elsewhere there were net purchases of European equity ETFs.

European equity ETFs, which includes the UK, normally represents about 66% of all equity flow. Of this amount, two thirds were purchase orders.

One market participant who wished not to be named said that before the Brexit vote some investors were reasonably nervous about what the markets would do and were holding a lot of cash in their portfolios. However, Friday was an opportunity to put cash into European equities at a good price. “The chances are there will have been some people who have made a lot of money.”

Between Monday and Wednesday this week the platform saw strong buying in US equities and net selling of UK and Europe. 75% of FTSE 100 and 250 ETFs saw net selling.

Pace said: “We have seen €2bn trade between Monday and Wednesday this week, which is 30% above the usual amount…. The increased activity is likely to be linked to Brexit, but month and quarter end is also likely to have an impact.

Fixed income continued as normal, accounting for a third of all trades on the TradeWeb platform. However, Pace explains that Friday was significant because the largest fixed income flows went into high yield, which is not typical of the activity we observe on the platform. “Normally, with market stress events, we’d expect to see flows into government bond ETFs. However, in government bonds – where yields have been falling – we saw 60% buys and 40% sells,” he said.


However, Pace was keen to highlight that Friday’s high trading volumes demonstrate the strength of the ETF market. “It shows how good liquidity in ETFs can be maintained in times of market stress. This is the third proper test that we have had for ETFs on our platform in the last 12 months, and each time we have seen trading accelerate. Ultimately, ETFs offer a fast way of allocating money to an asset class.”

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