Markets Media caught up with Steve Oh, Head of ETF Listings and Business Development at Nasdaq, to discuss exchange-traded funds (ETFs) amid COVID-19 and recent market volatility.
How is the ETF market faring?
The ETF marketplace is faring well. The entire ETF community is working well together during this volatility despite the challenges posed by COVID-19 and the associated measures taken by business and government leaders to protect people’s health.
Are there any issues with ETF liquidity?
Overall ETF liquidity has been strong. In fact, the early data is showing that investors are relying on the liquidity and access of ETFs even more during this volatile period. As volatility and trading volumes have gone up, ETFs are making up a larger percentage of overall equity trading as referenced by a recent report from the ICI. In general equity spreads have widened, including ETFs, but that can be expected with a significant spike in volatility and the associated risks to market makers.
Has ETF trading been ‘orderly’ during times of extreme volatility?
Yes, the trading of ETFs has been orderly, especially after concerns about all ETF investors trying to sell out at once during a market correction. Market data is showing that this isn’t the case at all, as ETF investors aren’t rushing out the exits simultaneously as originally feared and even some equity and fixed income ETFs have gathered new assets.
How has ETF trading held up compared with previous times of high volatility (for example, the August 2015 ETF ‘flash crash’)?
We are experiencing unprecedented and prolonged market volatility and the ETF structure has held up well to provide liquidity to investors. I think some of this is testament to the work that was done behind the scenes after August 24, 2015. Nasdaq was an important part of that, including the LULD (limit up limit down) procedures that were put in place by the industry working with regulators.
What is Nasdaq doing currently in the area of ETFs?
Nasdaq is currently the home to over 400 listed ETFs in the U.S. markets and ETF issuers have increasingly turned to our value proposition including low cost, a best in class execution platform, and strong brand alignment with top companies. Nasdaq Global Indexes has 332 ETPs tracking our indexes, listed in 20 countries on 24 exchanges globally. Nasdaq is also taking the lead in promoting ETF education to a broad audience to ensure investor confidence and to help encourage better academic research and regulations. Nasdaq has held an annual ETF education conference entitled “Synapse” with the goal of bringing together experts across the entire ETF industry to promote collaborative education. Partners have included Villanova School of Business and the CFA Society of New York. Nasdaq works with all our partners in the ETF industry including issuers, market makers, industry groups, academic and regulators to build a better marketplace to give investors more confidence in ETFs especially during times like this.
What is the broader outlook for ETFs, say for the duration of COVID-19 and beyond?
ETFs have performed well so far in being available to provide liquidity to investors looking to buy and sell through this unprecedented market volatility. Even as the impacts of COVID-19 are expected to persist, we expect this trend to continue with the ETF community working together to provide investors more comfort in being able to rely on ETF liquidity. We are optimistic that once volatility subsides regardless of the role that COVID-19 continues to play in our everyday lives, investors will gain a greater trust in the value proposition of the ETF structure in terms of liquidity, tax efficiency, costs and diversification. Investors have increasingly turned to ETFs in times of stress, as evidenced by higher volumes over the last three weeks. We anticipate that investors will continue to use ETFs to express their views about the market, especially for those asset classes and sectors where it is increasingly complicated/costly to transact in the underlying. Finally, we believe that ETFs will continue to act as price discovery vehicles, providing transparency into how investors are valuing assets. This is especially true in fixed income sectors where underlying bonds trade infrequently.