Jason Xavier, Head of EMEA ETF Capital Market at Franklin Templeton, has commented on the impact of recent coronavirus-related volatility on ETFs:
“Volatility is a function of investor flows and is driven by human behaviour. Even as market volatility skyrocketed, last week was proof that ETFs have not only enabled the democratisation of asset classes but are also now being actively used as a price discovery mechanism, particularly within fixed income.
“Appreciating market uncertainty in relation to the trading of ETFs is key to understanding the price discovery mechanism ETFs offer – and many investors utilise – during these volatile times. The last few days have seen underlying securities trade at extreme levels and at times, trade limit down during the trading day. During these limit-down periods, trading is halted and price discovery in the underlying securities is limited. In these moments, market uncertainty is at its peak, and the lack of clarity around prices have caused some ETF spreads to widen. However, the ability for ETFs to trade in the secondary market as well as for ETF market makers to set up proxy hedging and correlated pricing models has allowed price discovery and liquidity to be upheld, even during these stressful and uncertain periods.
“We encourage investors during these extremely volatile times to continue applying their proprietary best practises around trading. These best practises could be to utilise the multiple methods for trading – be that on-exchange via multi-lateral trading facilities (RFQ’s) or over the counter (OTC). Furthermore, these best practices ensure that suitable order types, like limit orders, are utilised should they be executed into volatile intra-day periods.
“Three decades since the inception of the first ETF, the product is now more relevant than ever. As more and more investors embrace its potential and benefits, a new generation of them is already taking full advantage of intentions laid out from yesteryear’s volatile periods.”