5 ETF Statistics to watch in high-velocity markets

BlackRock |30-Apr-2020

Many investors turn to exchange traded funds (ETFs) as flexible, cost-efficient tools for navigating volatile markets. As such, keeping a close eye on ETF statistics during times of market stress can help investors understand how ETFs operate and trade. iShares identifies five ETF statistics that can help aid the analysis of ETFs in high-velocity markets.

1. ETF flows

Why it matters: People follow aggregate ETF outflows and inflows —net flows—for insights into market sentiment and investor behavior.

Net flows represent, in dollar terms, fluctuations in demand. When demand for an ETF exceeds supply, new shares are created (inflow). When demand contracts, shares are redeemed (outflow). Net flows demonstrate how ETF investors allocate, adjust positions and manage risk.

In the heightened volatility of March 2020, the gross flow in ASX listed ETFs was over A$4 billion, twice that of the previous month and the biggest month in the past 5 years. There were some strong flows into equity (notably Australian equity) offset by some outflows in fixed income1.

2. Estimated impact of ETF flows on market prices

Why it matters: Questions sometimes arise about whether ETFs influence the prices of their constituent stocks and bonds.

During the month of March, Australian equity ETF gross flows were A$1.5 billion which is approximately A$68 million per trading day, compared to over A$10 billion traded per day on the top 200 stocks on the ASX (measured by the S&P/ASX 200 Index)1.

Like overseas markets, for more established ASX listed ETFs a lot of the on-exchange trading doesn’t affect the market price of constituent stocks in which ETFs invest. This is because ETF constituents are only affected by ETF trading when ETF shares are created or redeemed. For example; in March 2020 the ASX listed iShares Core S&P/ASX 200 traded $49million per day and around 50% of the trading occurred in the secondary market1.

3. ETF trading volume

Why it matters: More volatility typically means more ETF trading because investors use ETFs to rebalance or hedge in times of uncertainty.

Investors can compare the dollar volume of ETF shares that trade on exchange with the dollar volume of individual stocks to gauge the magnitude of ETF trading volume. It’s important to note that ETF trading volume measures only on-exchange transactions between buyers and sellers and is separate from inflows and outflows.

Trading volumes for Australian ETFs continue to grow, however recent numbers show that they still represent a small proportion of overall trading. In March 2020 total ETF trading on the ASX was 7.6% of traded value on the top 200 stocks on the ASX (measured by the S&P/ASX 200 Index)1.

4. Bid/ask spreads

Why it matters: ETF investors tend to have a laser focus on management fees but it’s important to remember the total cost of ETF ownership also includes transaction costs, largely captured by an ETF’s bid/ask “spread.” For active traders, transaction costs can add up—particularly during times of market volatility when pricing uncertainty can translate to wider bid/ask spreads.

In volatile markets the widening of spreads can be attributed to 1) increased volatility in equity & bond markets and 2) external factors that impact the market makers [ability to manage their risk].

During periods of volatility the ETF ecosystem has continued to operate as expected, with market makers providing liquidity.

5. Bond ETF trading versus individual bond trading

Why it matters: Individual bonds trade differently than ETFs and stocks, which are bought and sold on exchanges with transparent bid/ask quotations. In contrast, the bond market is relatively opaque and bid/ask quotations are not readily available. In stressed markets, trading individual corporate bonds can be time-consuming and expensive, which has led investors to increasingly rely on bond ETFs for more transparent, on-exchange pricing and trading.

When markets turn volatile, it’s important to understand trading volumes of bond ETFs versus individual bonds. These two statistics tend to diverge during times of volatility: bond ETF volumes rise while individual bond volumes fall. Investors have increasingly turned to Bond ETFs for clarity about what is happening across fixed income markets and to actively adjust portfolios. Bond ETFs can accurately reflect the conditions of the markets while improving price transparency, providing access to liquidity and offering immediacy of trading that may not available in individual bonds during this unprecedented period of market stress.

ETF statistics to watch in volatile markets

Investors are turning to ETFs during market volatility. We highlight four stats to keep an eye on in the latest episode of the BlackRock Bottom Line.