Volatility shows another side to ETFs

During these unprecedented times, industry experts turn to investment vehicle for another indicator

Volatility shows another side to ETFs

No matter what type of investment, the recent market downturn as a result of COVID-19 has resulted in losses. ETFs have not been immune but have offered some additional information in the form of price discovery.

“The past few weeks for ETFs have been the same as any product. When the market goes down, so do ETFs; there wasn’t any amplification,” said Pat Dunwoody, executive director, CETFA.

Yet one thing that was brought to her attention was the fact that many in the industry turn to ETFs to assist with price discovery in difficult times. “In times when the stress of the market has been extreme, like over the past few days, people turn to some of the larger ETFs, like SPY, which is basically the S&P standard, and use it to assist with price discovery. So, ETFs in that kind of environment assist the industry.”

Those thoughts were expanded by Ray Dragunas, portfolio manager with Aligned Capital Partners, in an article posted on the CETFA’s website. Dragunas also referenced SPY and the fact it trades in the premarket session, a feature that allows the ETF to give a reference point of where the market may open.

As for the recent impact on ETFs, Dunwoody said it depends on what portfolios are made up of in relation to what the market is doing. “If you have a travel mutual fund or ETF, you are taking a huge hit, but if it is something more stable or hasn’t felt the impact yet, it may not have gone down as much. I would hate for people to think their investments are going down quicker than the market. We use the statement ‘you don’t lose money until you sell’.”

That notion is something Dunwoody is stressing to advisors and ETF holders. “Since this isn’t an economic event, it is a health event, the assumption is once the health event is gone the market will come back to equilibrium. It all depends how long it goes. Some of the industries may not recover as quickly or at all. Once again, it is a question of talking to and listening to experts, and only sell or trade if you absolutely have to. Why take the loss if you don’t have to?  We hope that by the end of the year things will be back to normalcy.”

For those who do need to sell, Dunwoody says that ETFs do present a better situation because holders are able to get their money and managers do not need to sell pieces of the underlying portfolios to cut the cheques. “If there were a bunch of people who needed that money for whatever reason, they could get it. It would be painful because they would get less money, but if it was in a mutual fund, that portfolio manager would have to sell assets the portfolio and that is not positive for the remining holders of that fund.”

As the investment landscape continues to tread through unprecedented waters, Dunwoody reminds investors and advisors that ETFs should be treated as long-term investments, not trading vehicles. “We hope they wouldn’t redeem and panic sell, especially in an event like the last few weeks that wasn’t economic. The market should come back at some point when this crisis is over. That message I would hope would come from advisors too if they had nervous clients.”