The numbers we crunched tell us investors are using ETFs more and more — especially when markets are volatile.
ETFs make up nearly a third of the value of all U.S. equities traded and that percentage tends to spike in times of volatility, a sign that ETFs are becoming an increasingly popular way for investors to express an opinion quickly and efficiently.
The value of all ETF trades relative to all equity trades has clustered around 30 percent since the beginning of 2010, dropping as low as 20 percent and rising, as it has this week, to upwards of 40 percent in roiled markets, according to data compiled by IndexUniverse.
“Investors are using ETFs more and more to express a view,” Nicole Hunter, the director of US iShares Capital Markets, focusing on ETF market trading activity, said in a conference call Monday, noting that trading efficiencies of iShares products, in terms of bid-ask spreads, were enhanced as volumes spiked.
Hunter said data iShares analyzed from the New York Stock Exchange showed that all exchange-traded products made up 37.9 percent of all Big Board trading yesterday when the Dow Jones industrial average fell Aug. 8 by 634.76 points. That jump in ETF trading volume was 5 percent more than the trailing 20-day average of 32.5 percent.
A study by Credit Suisse confirmed iShares account about tight spreads, and the Swiss-based bank estimated the percentage of ETF trades to be as high as 40 percent in volatile markets.
ETFs are indeed becoming central to financial markets. Total ETF assets reached a record of $1.138 trillion in late April, according to data compiled by IndexUniverse. But all the selling in late spring and this summer, particularly in the past week, brought ETF assets back under $1 trillion yesterday for the first time since the industry crossed the $1 trillion threshold in December.
In spite of the recent market-related retreat in assets, investors continue to gravitate toward ETFs. Through the end of July, year-to-date inflows into U.S.-listed ETFs totaled $71 billion, according to data compiled by IndexUniverse.
Yesterday’s sizable inflows into the world’s biggest exchange-traded fund, the SPDR S&P 500 ETF (NYSEArca: SPY) was the perfect example of how ETF popular ETFs are becoming. Even though SPY’s underlying index, the S&P 500, plunged 6.66 percent on Aug. 8, the ETF pulled in almost $1 billion in new money. SPY was launched in January 1993, and had $76 billion as of yesterday’s close.
Number Of ETF Trades Rising Too
The increased use of ETFs in times of high volatility can also be seen by looking at the number of trades.
ETFs make up around 10 percent of the number of actual trades across all U.S. exchanges, according to data compiled by IndexUniverse.
That number reflects the so-called consolidated tape, so it includes a multitude of smaller individual companies listed over the counter.
What that means is the economic impact of high-dollar trades of ETFs or, say, Apple’s stock, are lost in a small number like that.
But just as is the case with volumes measured by value, the number of ETF trades as a percentage of all equity trades appears to be on the rise, and also increases when markets are roiled.
In recent sessions as stocks have been in a sharp correction, that number has approached 20 percent, as our chart below shows. That suggests that more investors are using ETFs, and that those that do use ETFs are choosing to use them with greater frequency, as Hunter at iShares surmised.