New research from the Investment Funds Institute of Canada (IFIC), written to provide an analysis of exchange traded fund (ETF) liquidity and functioning during the global pandemic, shows that ETF trading during periods of stress did not negatively impact underlying markets.
The report, ETF Resiliency in the COVID-19 Financial Crisis: A Canadian Perspective, in fact found that ETF trading provided an added layer of liquidity and price discovery.
“Given the growth in assets and sales in ETFs in recent years, questions have been raised about the risks associated with ETFs and broader market stability,” the report states. It adds that the COVID-19 pandemic and the related financial crisis created an unexpected test of the concern that investors, when faced with an external shock, would rush to sell their ETF shares. “From a thorough examination of what transpired, it is clear that Canadian ETFs, as well as ETFs in other markets, proved resilient.”
The report found greater participation on the part of designated brokers and market makers. Despite extreme stress in the bond market, bond ETF redemptions were modest relative to assets and did not impact underlying markets, and equity ETF spreads improved relative to their underlying baskets during the height of market stress, they write.
“Designated brokers and market makers facilitated ETF creations and redemptions throughout the selloff of bond ETFs and there is no evidence that they stepped away or failed to meet their obligations to provide quotes during what turned out to be a very stressful period,” the report states. “When the underlying bond liquidity declined, ETFs offered access to an otherwise frozen market. For equity ETFs, the liquidity profile improved during the market stress relative to underlying securities.”
Paul Bourque, IFIC’s president and CEO says his organization felt it was important to address concerns voiced by regulators and policymakers about liquidity and market stability risks associated with ETFs. “We were pleased to find that ETFs proved their resilience during the pandemic and that investors continue to show confidence in these funds.”
