The rise of exchange traded funds (ETFs) has led to questions about how such financial vehicles will play into market weakness in the future.
While much of the discussion surrounding ETFs has tended to centre on the potential downside of such securities in causing over selling during periods in which redemption outflows from these funds require liquidating large equity positions in the open market, a number of factors stand to insulate investors which are less talked about.
One key aspect of ETFs is that these funds typically do not provide for significant buying or selling on any given day, due to the nature of financial markets and the fact that most shares on a given day trade hands with a counterparty.
In recent trading days, volumes for many of the largest ETFs including SPY tracking the S&P500 have spiked upward, with more than $180 billion changing hands on a daily basis near the tail end of last week.
That being said, a small fraction of this (less than 10%) actually resulted in any shares trading hands on the open market - the vast majority of SPY sellers had a counterparty to trade with, a fact which should alleviate some concerns about ETFs affecting liquidity.
ETFs are not a novel financial vehicle, and investors ought to remember these securities were tested and survived the most recent recession. I believe ETFs, as a broad measure of the market, continue to be excellent tools for passive investors looking to gain or sell exposure to the market, and will be for the long haul.
Invest wisely, my friends.
