ETFs have held up well amid coronavirus: ETF Trends CEO

Tom Lydon, ETF Trends CEO, spoke with Yahoo Finance about how ETFs are holding up during this time of economic crisis.

Video Transcript

MYLES UDLAND: We're joined now by Tom Lydon. He's the CEO of ETF Trends. Tom, thanks for calling in. Good to see you again, even though we are about 3,500 miles apart right now. Let's talk a little bit about what we've seen in the ETF space, and we'll start with fixed income. Because there have been a few weird dislocations, I guess we could say, where we've seen pretty big discounts to NAV-- net asset value.

Basically, the bond ETF wasn't priced at, I guess, what the underlines would imply. Just kind of walk us through what happens in that situation and what you've seen in the space over the last week or so.

TOM LYDON: Yeah, for the most part, ETFs have really held up well, though, Myles. When you think about it, all the volume-- now 45% of New York Stock Exchange volume is actually ETFs. And you're not hearing anything about problems that we've had in the past like flash crash and that type of thing. If you're talking about fixed income, however, when you think about some of these high yield bonds-- these corporate bonds-- the underlying holdings aren't always priced every day, because they don't trade every day.

And in some instances where mutual funds have to use pricing services that use past prices, their prices aren't actually accurate. When any ETF has an authorized participant that comes in to come in and put the spread together when sometimes the underlying NAV is not what you'd normally see with that price, they will go in and buy the underlying shares, and then take the underlying pieces of the bonds and then sell them back to the marketplace.

Well, in this case, they just weren't worth it. So the underlying word at the normal price is that you're getting for the pricing units-- so they, in fact, were providing more accurate pricing than mutual funds out there. There's been a lot of misreporting that's been going on. And I think right now, a lot of that is settled. We've seen a lot of these discounts settle back up where actually some ETFs are trading at premiums these days. But it's been a good experience to go through, and even more so shows how ETFs held up well during this period of volatility.

RICK NEWMAN: Hey, Tom, Rick Newman on the other side of the internet-- a couple of questions for you. I've heard some active managers complaining that ETFs have been contributing to volatility. Is that what you were just describing? Or is that something else? And what's the deal with liquidity? Is the liquidity problem resolved at this point? Or is it still there?

TOM LYDON: Hey, Rick, good seeing you. So first of all, it has not been helping volatility. It actually provides more liquidity. So in the case of a fixed income marketplace, because bonds are not traded on exchanges, but ETFs that represent them are, we've got a great situation here where people that are looking for exposure in all different types of fixed income are able to go to the ETF marketplace and get it in something that's trading on a regular basis. OK?

So I think that's something that we really have to understand. Most investors over the years have invested in individual stocks or mutual funds. What we're seeing is ETFs, in fact, are getting better pricing than mutual funds. And I think we're going to look back on this in the months to come, as we are always weighing mutual funds versus ETFs. And again, both serve certain purposes, but more and more, ETFs are earning their weight, for sure.

MYLES UDLAND: Tom, let's wrap on this-- I'm just curious what areas we've seen, or you've seen, big inflows towards? Because you know, certainly in a market like this, we've asked a lot of people, are you just sit on your hands doing nothing? And you know, some managers have said, yes, others have said, I'm nibbling here and there. What have flows been like in the ETF space in the last couple weeks?

TOM LYDON: So a couple of things-- we survey advisors all the time, Myles, and I'll tell you-- they are sticking to their knitting. They've got rebalancing that are coming up in the quarter, and more than 2/3 are saying that they're sticking to it. Very few have sold, so that's good. However, there's been a lot of interest in areas like oil-- areas of volatility that have been exacerbated by what's going on overseas with Saudi Arabia and Russia and their effect on pricing.

So that's something to take a look at. There are inverse and leverage ETFs that are out there, and for the most part across the board who've done well. Here's a situation where you can take a small amount of money and get a decent size allocation and a portfolio-- again, not for the faint of heart, not for the average investor, but advisors have been using them and they've been doing exactly what they're supposed to do.

MYLES UDLAND: All right, Tom Lydon is the CEO of ETF Trends. Tom, good to see you. And stay safe, stay home, stay healthy, we'll talk to you soon.

TOM LYDON: You too, Myles. Take care.