Viewing volatility versus uncertainty through an ETF lens

Mar 9th, 2020 | By | Category: ETF and Index News

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By David Mann, Head of Capital Markets, Global ETFs, at Franklin Templeton.

David Mann, Head of Capital Markets, Global Exchange-Trade Funds, at Franklin Templeton Investments

David Mann, Head of Capital Markets, Global ETFs, at Franklin Templeton Investments.

In times of increased market volatility, ETFs will tend to trade at their typical bid/ask spreads even if the broader markets are up/down multiple percentage points.

The reason is that market makers quote our funds based on the value of the underlying securities, and even during big market moves, they will still have confidence in those values.

As an example, during last week’s large market selloff, our equity-based funds that typically have spreads in the 2-4 cent range still had those spreads even with the broader market down more than 3%. Investors should feel confident trading them, even during days with significant market moves.

On the other hand, market uncertainty, such as the unexpected 50 basis point interest-rate cut by the Federal Reserve recently, can and usually does cause a temporary widening of spreads. Whenever there is pending or unexpected news, ETF market makers will have doubts as to the value of the underlying securities and will thus widen out their ETF spreads accordingly.

This is true of all ETFs (not just ours). Investors should consider avoiding trading ETFs during times of market uncertainty. It is typically short-lived, and once the market makers have had time to digest the news and how it might impact the underlying security valuations, spreads typically fall back in line with the norms.

We continue to monitor our funds at all times and will gladly send updates as needed as to our opinions of the best times to trade.

(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)

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