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ARCHIVE
The Liquidity Provided by ETFs Is No Mirage
By Todd Bernhardt
June 20, 2016
The following ICI Viewpoints post is an adaptation of an ICI response to a June 15 article in InvestmentNews titled, “The ETF Liquidity Mirage.”
The article above ignores fundamental information about ETFs, the behavior of investors, and the effects of market structure on the ETF product. Let’s quickly examine a few facts.
To begin with, the author mischaracterizes the events of August 24, when substantial selling pressure in the U.S. equity markets early in the day revealed weaknesses in market structure that affected some domestic equity ETFs as well as some very large U.S. stocks. As has been widely documented, poor price transparency at the open of the markets, volatility limits imposed after the 2010 “flash crash,” and improper use of market and stop-loss orders by investors demanding liquidity at any price were the factors that temporarily affected the arbitrage mechanism behind these ETFs—rather than anything having to do with the nature of the ETF product itself. In fact, the majority of U.S. equity ETFs were unaffected, as was the entire domestic bond ETF market and ETFs that invest in international securities.
The article also dismisses the benefits of ETF trading in the secondary markets, where the funds act as a source of liquidity because they provide an efficient and cost-effective mechanism for investors to reduce or increase their exposure to a particular asset class or investment strategy. In these cases, only the ETF shares change hands among investors who want to buy or sell, depending on their differing viewpoints of the future rate of return on that asset class or investment strategy—not shares in the underlying securities. Thus, in times of stress, secondary-market trading in ETFs actually relieves pressure on the underlying securities held by the ETF.
This benefit has been tested repeatedly, particularly in ETFs that primarily hold less-liquid assets. The most recent example of ETFs´ resilience during times of volatility occurred late last year, when sellers of high-yield bond ETFs found willing buyers in the secondary market, and ETF shares were not redeemed en masse back to the funds. Indeed, ICI Research has demonstrated that the vast majority of ETF trading occurs on the secondary market, where a variety of investors buy and sell to each other directly, rather than through creation or redemption of ETF shares by authorized participants (APs).
Those interested in finding out how ETFs actually work and how investors use and benefit from them can visit ICI’s ETF Resource Center, which is full of fact-based research and analysis, rather than speculation and incomplete information.
Todd Bernhardt is senior director for public communications at ICI.
TOPICS: Bond FundBondsEquity InvestingExchange-Traded FundsFinancial MarketsFinancial StabilityFixed Income
Cybersecurity at Work: The Benefits of Information Sharing Networks
By Peter Salmon
June 16, 2016
In the last installment of this blog series, we wrote about the need for training—specifically, cyber tabletop exercises.
TOPICS: CybersecurityOperations and Technology
When Investor Protection Becomes Protectionism
By Patrice Bergé-Vincent
June 14, 2016
Today, Europe is facing two related needs: to provide its citizens with efficient, lower-cost vehicles for savings and investment, and to bolster economic growth.
TOPICS: EuropeFinancial MarketsFund RegulationICI GlobalInternationalMutual FundTaxes
Industry Operations Leaders Address Needs of Investors and Advisers
By Candice Gullett
June 6, 2016
In conversations exploring regulation, demographics, and technology, industry leaders offered their perspectives on serving investors and advisers in an evolving world at ICI’s annual Operations and Technology Conference, held concurrently with the General Membership Meeting on May 18–20 in Washington, DC.
TOPICS: EventsGMMOperations and Technology
Industry Leaders Address Changing Industry Terrain
By Miriam Bridges
June 3, 2016
Will fund industry leaders need to rethink their traditional operating models? Experts shared their views on this question and others, as well as the opportunities presented by a rapidly changing industry, in a candid discussion on the second day of ICI’s 58th General Membership Meeting, held May 18–20 in Washington, DC.
TOPICS: EventsFund RegulationGMMMutual Fund
Conducting Business in a Rapidly Changing World
By Jeanne Arnold
June 1, 2016
The global operating environment is evolving and it is critical for corporations to understand the changes afoot if they are to succeed in the 21st century, said Kevin Kajiwara, co-president of Teneo Intelligence, a division of global advisory firm Teneo. Speaking on the final day at ICI’s 58th General Membership Meeting (GMM), Kajiwara gave an overview of the economic and political shifts taking place around the world during his session, “Geopolitical Risks and the Global Economy.” After the overview, he engaged in an insightful question-and-answer session with Tom Faust, chairman and CEO of Eaton Vance Corp.
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