So What Did We Learn?
While CFRA encourages investors not to dwell too much on short-lived market events, there are lessons to be learned three years after the flash crash of 2015.
For starters, ETF investors would likely fare best if they focused more on when and how they trade. The first and last 15 minutes of market hours tend to be the most volatile, and so the middle of the day is generally best for avoiding volatility.
During the middle of the trading day, the underlying securities inside an ETF will likely be open, but large orders from institutional investors are more likely closer to the end of trading.
In addition, investors might benefit from using a limit order and not a market order, so they can control the price they pay to buy or sell. A market order gets executed practically immediately, regardless of the differential between the price and the NAV.
Limit Orders Vs. Market Orders
Investors using a limit order submitted in the middle of the day on Aug. 24, 2015 would likely have experienced that day more positively than other investors who placed market orders when prices were down.
It is three years and counting since the stock market’s flash crash caused some ETFs to trade poorly for the opening minutes of market activity. The absence of further incidents helps validate that investors should expect a good experience if and when they want to trade.
In the past six months, investors traded more than $900 million of IVV (equal to 0.6% of its total assets) and $46 million of RSP (0.3%) on a daily basis—without experiencing the extreme intraday volatility of Aug. 24, 2015.
Exchange-traded products now manage $3.68 trillion in assets, nearly double the base from three years ago. Demand has climbed despite persistent market surprises, including the Trump election, the Brexit vote and a junk bond sell-off that caused the liquidation of a sizable Third Avenue mutual fund.
Exchange-traded products have gained share from mutual funds, and some investors are further replacing individual stocks and bonds with diversified strategies that can be traded on an exchange.
At the time of writing, neither the author nor his firm held any of the securities mentioned. Todd Rosenbluth is director of ETF and mutual fund research at CFRA, an independent research firm that acquired S&P Global Market Intelligence's equity and fund business in October 2016. He can be reached at [email protected]. Follow him on Twitter @ToddCFRA.