Last month saw the use of exchange-traded funds increase significantly due to volatility, but experts believe ETFs will continue to gain volume share even if volatility dies down.
In August, as the stock market experienced multiple day-to-day swings, the notional volume of ETFs represented 36 percent of all U.S. trading, up from 30 percent in July, and continuing a long-term trend toward increased use of ETFs.
According to Laura Morrison, head of U.S. exchange traded products for NYSE Euronext, the months leading up to the red-hot summer saw ETFs making up between 25 percent and 30 percent of the market.
Though there are occasional spikes in ETF use, the largest being in 2008 due to the financial crisis, the percentage of total volume made up by ETFs has been steadily increasing.
"You’ll always see ETF volumes spike during times of uncertainty, just because of the inherent liquidity, the inherent transparency," said Kevin Quigg, head of ETF global capital markets at State Street Global Advisors. "What you’re also starting to see is ETF volume as a natural occurrence throughout the capital markets system continues to rise."
As a result, more parties are becoming interested in making markets or being trading partners in the ETF business, according to Quigg.
"All of a sudden you have a marketplace where people that traditionally stayed within a finite set of ETFs are expanding their horizons," he said. "And the industry–from a trading perspective–is just getting larger."
Morrison agrees. She said investors are increasingly using ETFs because they allow for a very fast, efficient and low-cost way to gain exposure to a broad basket–either of equities or another asset class.
