ETF Trading Spikes In Volatile Times

Exchange-traded funds are often heralded for their transparency and low cost relative to mutual funds, but tradability was the trait investors seemed to value most in June as they sought to express their views in a volatile equities market.

June was rough for anyone with skin in the equities and bonds games, as the U.S. Federal Reserve began suggesting that the end of the easy money era might be in sight, pushing bond yields higher, bond prices lower and equities markets into volatile spin. The S'P 500 ended the month 1.5 percent lower, while the market’s so-called fear gauge, the CBOE Volatility Index futures (VIX), reached an all-time volume record for the month of more than 4 million contracts.

In that environment, ETFs accounted for roughly $1 of every $3 in trading volume in U.S. equities markets, according to data compiled by BlackRock. That’s strong by historical standards—ETFs often represent less than a quarter of total trading dollar volume. That mark came even as ETFs saw record net outflows of some $12 billion of assets in June .

We’ve crunched these numbers at IndexUniverse in recent years and come up with similar results, but some ETF industry sources, including Credit Suisse, have said the dollar percentage of ETF trading can spike above 40 percent when markets become roiled, as was the case in August 2011 around the time of debt-ceiling talks in Washington D.C., that culminated with the downgrading of U.S. sovereign debt by Standard ' Poor’s.

“When headline-making news triggers a sudden shift in investor sentiment and market volatility jumps, it has been followed by elevated ETF trading volumes in absolute dollar terms and also in proportion to total US equity market trading volumes,” Dodd Kittsley, head of Global ETP Market Trends Research for BlackRock, said in a blog posting this week.

“It’s important to note that June saw orderly trading of ETFs and, as designed, ETFs delivered liquidity under stressed market conditions,” Kittsley said. “Investors were able to move quickly and efficiently in and out of investment exposures, and this is a trend we expect will continue as more investors turn to ETFs to execute precise market views.”

That’s certainly not the case in a mutual fund, for instance, where investors don’t get the opportunity to buy or sell intraday, making for a “flat” experience, IndexUniverse President of ETF Analytics Dave Nadig said.

Dicey Investment Behavior

“It's important to remember that intraday trading is a two-way street, and while the ETF market has been functioning pretty much flawlessly in this newly volatile market, volatility can trigger bad investor behavior,” Nadig said.

“We've had days lately when certain ETFs have traded down 5 percent and recovered 5 percent all within a few-hour window,” he added. “If you see that on your screen at noon, it can be easy to panic.”

“That makes ETFs a great tool for ‘capitalizing’ on volatility, but investors need to understand that just because they can trade ETFs with whimsy and frequency doesn't mean that they should,” Nadig noted.

In June, the SPDR S'P 500 (SPY)—the largest ETF in the world, with some $133 billion in assets—was the most heavily traded ETF, with turnover that exceeded $572 billion, nearly five times as much dollar-traded volume as the second-most-traded ETF, the iShares Russell 2000 ETF (IWM).

On a year-to-date basis, SPY also leads the trading charts, with turnover of more than $2.75 trillion since the end of 2012.

Below, we tally the 10-most-traded ETFs year-to-date. Interestingly, this lineup includes funds tapping into U.S. equities, U.S. fixed income, international equities and gold—a rather diverse showing of asset classes.

Also of note, the ninth-most-traded ETF in June, the iShares U.S. Real Estate ETF (IYR)—a fund that saw turnover last month of $26.28 billion—is the only top-traded ETF in June that does not make the year-to-date tally.

The SPDR Gold Shares (GLD), the fifth-most-traded ETF so far this year, with dollar trading volume of $241.4 billion, is also suffering through one of the worst asset-losing streaks of the year. It has recorded net redemptions of about $18 billion year-to-date.

Liquidity Mavens
Ticker Name Issuer June YTD Flows June YTD AUM ($, M) June YTD Turnover
SPY SPDR S'P 500 SSgA -4.551,56 133.335,51 2.752.330,66
IWM iShares Russell 2000 BlackRock 2.698,20 21.852,07 476.890,51
EEM iShares MSCI Emerging Markets BlackRock -8.189,07 34.935,12 325.828,74
QQQ PowerShares QQQ Invesco PowerShares 416,48 33.645,15 304.504,18
GLD SPDR Gold SSgA -18.175,30 37.137,64 241.434,22
EFA iShares MSCI EAFE BlackRock 581,45 40.201,94 147.168,97
VXX iPath S'P 500 VIX Short-Term Futures ETN Barclays Capital 521,41 1.188,57 137.376,58
TLT iShares Barclays 20+ Year Treasury Bond BlackRock 1.351,68 4.220,66 125.627,66
XLF Financial Select SPDR SSgA 3.412,25 14.446,11 122.264,60
DIA SPDR Dow Jones Industrial Average Trust SSgA 204,54 12.568,83 121.092,29



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