ETF Market Shrinks as Volatility Jumps: CFRA

The U.S. exchange-traded fund market contracted last month as spiraling equity and bond markets pushed investors toward safer places to park their money, CFRA Research analysts said in a note. 

ETF assets fell $520 billion to $5.91 trillion in September from August, and plummeted $1.13 trillion from March. Meanwhile, flows narrowed 35% from August to $23 billion in September, the note stated.  

Rising volatility in equity and bond markets caused dramatic shifts across asset classes and their corresponding ETFs, heightening investors’ recession fears. The S&P 500 slipped more than 9% in September alone—the worst September in two decades—while the Nasdaq composite lost more than 10% in the same period.  

At the same time, the VIX volatility index surged more than 21%. Bond markets have also gone into a tizzy, with the yield on the 10-year note jumping to more than 4% for the first time since 2008.  

Net asset value, which refers to the value of all the securities held in the ETF, also fell, hitting equity-focused funds the hardest. Only 59% of equity ETFs stayed in “close proximity” to their NAV, the note said, dropping from the 76% that held close to the metric in August.  

Downward Pressure

“Heightened volatility is the reason behind the decline in ETF price efficiency,” Aniket Ullal, head of ETF data and analytics at CFRA Research, said in the note. “This is not surprising as unloading equity ETF shares by investors put downward pressure on ETF share prices, which resulted in ETFs being traded at a discount two-thirds of the time.” 

Meanwhile, 58% of bond  ETFs stayed in close proximity to their NAV, representing a “moderate decline from August,” which CFRA attributed to “selling pressure on bond ETFs holding less liquid bonds – bonds with lower credit ratings and higher maturity – which makes it harder for ETFs to maintain price efficiency.”  

Large ETF issuers have also felt the heat, with three of the largest names in the ETF industry reporting decreasing flows and fees in the third quarter.  

Yesterday, State Street Corp. announced $14 billion in net outflows from ETFs in the last quarter, $9 billion of which stemmed from equity funds. Charles Schwab Corp.’s ETF revenue, assets under management and fee revenues all also dropped, while BlackRock Inc.’s iShares ETF inflows retreated by more than half compared to the same time last year.  

Contact Shubham Saharan at [email protected]