Markets are staring to rally from historic losses on Friday, but there’s one area that has no need for recovery – exchange traded funds have been the breakout star amid Brexit-induced volatility.
Investors flocked to ETFs in efforts to remove risk from their portfolios, a typical occurrence following a major market event says Pat Chiefalo, managing director and head of iShares Product at BlackRock Canada.
“ETF volumes spiked on the Friday, we saw double what we typically would on the TSX,” he says. “We have 20% of trading share versus the 10% on any typical day, so it was good to see that.
“The liquidity was there, investors were able to trade quite heavily, and we saw the top five ETFs traded on the day were ours.”
He anticipates the demand to last for the long term, despite a tentative rebound from several days of weak markets.
“The whole Brexit issue is going to take a long time to play out. It’s not a one-day event that gets priced in and then we move on,” he says. “I think we’ll see, as the news flow around it quiets down, that we’ll get more normalizing volatility levels and effect in the market, but that doesn’t mean there isn’t headline risk any more, or volatility to come.”
Chiefalo adds that the firm’s minimum volatility ETFs have become especially popular, as they provide a higher-return alternative than simply moving into fixed income and cash.
“Minimum volatility investments are a great tool for investors looking to dial down that equity-like risk, but not give up the return of what you’d usually see from equities,” he says. “We’re seeing a huge uptake in those types of products this year – and as more of these events come in, these products are looked to to help manage those events in the market.”
However, he says not to rule fixed income out altogether, despite today’s rock-bottom yields.
“We use it as a great asset class to mitigate risk, though given what’s happened with the Brexit, yields have moved lower and from an income perspective, fixed income is a little less attractive than it was before,” he says. “But during these types of market, fixed income, and fixed income ETFs offer the chance to diversify their portfolio and mitigate the downside risk… so thinking about fixed income as a holding in a portfolio is about balance to help mitigate against some of these market moves.”
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