The Liquidity Unicorn: Are any ETFs Truly Bulletproof During Market Stress?
In the ongoing discussion about liquidity and exchange-traded funds (ETFs), David Mann, Head of Global ETFs Capital Markets, examines a recent report outlining how ETFs have navigated the pandemic. He says it provides some validation that lower-volume funds are not all that different than higher-volume ones in navigating such crisis periods.
As the year draws to a close, I have slowly been working through some of the various research reports and white papers stacked on my office desk. One of those was the International Organization of Securities Commissions (IOSCO) report from a few months ago, which analyzed how ETFs handled the COVID-19-induced market stress of March 2020. You can find the link to that report here.
As my loyal readers hopefully know by now, this is a topic we have discussed at length over the past year and a half. Just to pick a few of the greatest hits:
- The differences between market volatility and market uncertainty.
- How ETF arbitrage might break down.
- Best practices during times of market stress.
There are not any major surprises in the report. Although looking back, I still cannot believe some of the premium/discounts and bid/ask spreads ETFs experienced in March of 2020. I should note that typically these reports are used to defend the ETF structure given that critics tend to speculate how unexpected market events might strain the ETF wrapper. This sentence is taken from the report’s summary:
“Overall, available evidence has not indicated any significant risks or fragilities in the ETF structure, although a subset of ETFs temporarily experienced unusual trading behaviors.”