17 March 2020
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Data published by BlackRock has pointed to four key trends in the European ETF market over the past week, around issues such as trading volumes, discounts, forced selling and sentiment.
1. Record trading volumes evidence liquidity amidst volatility
- In Europe, last week's ETF trading volumes surged to a record $120bn, beating the new record sets in the previous two weeks - volumes reached $110bn in week of 24 Feb, and $113bn in week of 2 March. For comparison, weekly average volumes in 2019 were just over $44bn.
- On the busiest days European ETF trading has made up around 30% of all equity trading, compared to c.20% in the busiest days of 2019. On several occasions, the iShares S&P 500 Ucits ETF (CSPX) was the most liquid instrument on the S&P 500, trading more than $500m in one day, when the US equity market was closed and US equity futures were halted.
- In bond markets, iShares Ucits Fixed income ETFs traded around $16bn for the third week in a row, over 200% higher than the weekly average in 2019. The largest trading days saw turnover in iShares EUR Investment Grade Corp Ucits ETF (IEAC) reach $1.2bn on 6 March (6.6x the average daily volume seen during the last 12 months). Turnover in iShares EUR High Yield Ucits ETF (IHYG) reached $590m on 13 March (5x ADV). As in previous stressed markets, investors turned to ETFs to de-risk and get pricing while underlying bond markets were impaired.
2. Bond ETF ‘discounts' translate into real-time prices
- The transparency of on-exchange ETF trading has proven valuable to active investors and other market participants during times of stress, since ETFs help establish real-time prices when trading in the underlying market is impaired. This was especially the case last week as bonds faced an unprecedented deterioration of liquidity and market quality around the globe.
- Disruptions in the fixed income markets last week led to differences between bond ETF prices and the values of their constituent bonds. So-called "discounts" to net asset values (NAVs) can occur because bond ETFs tend to trade more frequently than individual bonds, especially in times of stress.
- It's important to note that recent discounts in bond ETFs do not reflect a problem with the ETF structure itself. Rather, investors should think about an ETF as a leading indicator of market prices since it transmits real-time information about the quality and accessibility of the underlying markets.
3. ETFs are not forced sellers
- Concerns that ETFs would become forced sellers in the event of high volumes of redemptions are unfounded. Redemptions have been orderly and generally accounted for a fraction of the overall trading that has taken place in the ETF, with significant trading taking place in the secondary market for the ETF units.
- For ETFs, the creation / redemption mechanism provides additional choice to execute flows both on an in kind and cash basis. In-kind redemptions are the most common method by which redemptions are made, which means that when an investor wants to redeem ETF shares, they are exchanged for a basket of securities, instead of selling securities to generate cash.
4. Insights into investor sentiment
- EMEA flows are showing no signs of capitulation yet: since the market selloff began, flows have remained relatively resilient when viewed against a backdrop of very strong inflows from the start of Q4 2019 to mid Q1 2020. As a proportion of flows that were added from 1 October to 21 February, only a quarter of EM money has come out, with just 6% out of European equities and 4% out of US equities.
- US investors have shown a greater propensity to buy-on-dip this month, with most of the inflows added to US-listed ETPs. In EMEA, investors sold c.$3.9bn of equities and c.$2bn of fixed income last week, preferring to add to commodities instead. Globally, gold ETPs have gathered $1.6bn this week ($1.2bn of which went into EMEA-listed funds), continuing a trend of positive gold flows.
