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Why ETF Trading Surges in Fast, Risk-Off Markets


Trading in ETFs typically accounts for around 30% of the overall volume in equity markets but the percentage spikes in fast-moving, risk-off markets like Friday’s in the wake of the dreadful employment report.

“In times of distress, investors use ETFs for liquidity and the ability to shift quickly,” said Robert Trumbull, head of institutional ETF sales at State Street Global Advisors, in a recent interview at the company’s Boston headquarters.

He estimated ETFs are now approximately one-third of U.S. equity trading volume.

Chris Hempstead, director of ETF execution services at WallachBeth Capital, says he has seen the figure approach 40% on some days during the past few years.

“ETF trading spikes when people think events are highly correlated and macro in nature,” he noted.

When the market is moving on negative headlines like Friday’s ugly nonfarm payrolls report, ETF trading tends to surge.  [Treasury ETFs Continue Screaming Higher After Dismal Jobs Report]

“When the percentage of ETF trading in markets pops, a lot of it is people putting on trades to hedge bets. It’s not buy-and-hold,” Hempstead said.

This phenomenon is one of the most important ways that ETFs have changed the way investors trade the market.

The 2008 financial crisis “showed the benefits of ETFs as institutions looked for liquidity,” said Trumbull at State Street.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.