ETFs’ Share of Trading Volume Grows

Exchange-traded funds’ share of stock market trading volume grew over the past year, as traders used them in strategies to reduce volatility sparked by rising interest rates, inflation and turmoil in regional banks. 

ETFs make up about 32%-33% of total stock market trading, according to Shelly Antoniewicz, senior director of industry and financial analysis at the Washington, D.C.-based Investment Company Institute, an asset management industry trade group. That’s a boost from 31% in 2022, and a leap from the approximately 26% share ETFs typically held going back to 2013. 

ETF trading jumped last year as stock markets had their worst year since 2008’s Great Recession, with the SPDR S&P 500 ETF Trust (SPY) falling 20%. The VIX measure of volatility surged 30% as Russia’s invasion of Ukraine pushed commodity prices higher and the Federal Reserve began raising interest rates for the first time in two years in an effort to tame spiking inflation.  

“In volatile periods, we tend to see more trading in ETFs,” Antoniewicz told etf.com in an interview. “They are diversified, trade at tight bid/ask spreads, they can be sold short. They will often be used as a hedge to gain short-term or shed short-term asset exposure.”  

The rise in ETF trading is also due to their growing popularity among investors interested in investing in indexes rather than individual stocks, said Rob Isbitts, co-founder of Sungarden Investment Publishing in Weston, Florida. The industry has grown to include $7.11 trillion in assets since the first ETF was launched 30 years ago, according to etf.com data. 

“This is how ETFs are changing investing,” he said in an interview. “They aren’t buying this or that small cap; they’re buying the small cap ETF.” 

At the same time, mutual funds are losing assets to exchange-traded funds, which have liquidity and tax advantages.  

Trading in ETFs has remained high this year due to turmoil among regional banks that led to the collapse in March of Silicon Valley Bank, Signature Bank and others, Antoniewicz said. 

“It’s still fairly elevated with the banking sector turmoil. We’re still in this environment.” 

Whether ETFs keep their recent share of stock market turnover may be difficult to determine, Antoniewicz said. 

“Given the macroeconomic environment, it’s hard to say if it’s a permanent increase or if it was more related to a general pattern when there’s market volatility,” she explained. 

Contact Ron Day at [email protected] or follow him on Twitter at @RonDayETF