The June market maelstrom that saw some marquee
, such as the iShares MSCI Emerging Markets Index Fund (NYSE:
), move noticeably away from its net asset value and some banks
stop taking redemption orders set off a flurry of predictable
In recent years, ETFs have become a favorite whipping boy for
the ill-informed to blame market meltdowns on. Investors always
love to know why something goes astray in financial markets, and
some organizations have served up ETFs on a silver platter as the
asset to class to blame for everything from down markets to global
Well, ETFs have not yet been blamed for global warming, but it
just be a matter of time
The reality is ETFs, even amid increased market volatility, have
mostly been behaving as expected. BlackRock's (NYSE:
) iShares unit, the world's largest ETF issuer, highlights as
"During the market volatility of the past few weeks, ETFs
performed precisely as they are designed to do. Despite extreme
stress in underlying markets, ETFs in many cases performed better
than ever in allowing investors to move quickly and efficiently in
and out of investment exposures," said Global Head of iShares Mark
Weidman in a note
to the firm's clients
Naysayers may be quick to point out that iShares is merely
protecting its own interests. That is probably true, but BlackRock
is the world's largest asset manager and ETFs are far from the
company's only line of business. More importantly than any company
defending its products when those products are assailed with
opinion not facts is that iShares and other ETF sponsors have
realized that now is the ideal time to educate investors about the
inner workings of ETFs.
For its part, iShares is planning to roll out an investor
education program. Sure, that could benefit the firm, but investors
that have been tricked into thinking ETFs are the scourge of
financial markets could be the real beneficiaries. More information
means more informed investors and better decision-making and those
factors should be hallmarks of efficient capital markets.
Of course, investors of all stripes want to know that when
market volatility spikes that they will be able to move in and out
of ETFs at a moment's notice. Weidman notes that iShares does
business with 45 authorized participants that create and redeem ETF
shares. Last week, iShares reconfirmed that it is business as usual
at all 45 firms.
That may not be enough to assuage those investors that are
alarmed by some ETFs occasionally veering away from NAV. In the
wake of those concerns,
Benzinga examined just how often
ETFs move noticeably away from the underlying NAV. iShares and
PowerShares funds, combined roughly 20 percent of the total U.S.
ETF universe, were examined, and the fact is the vast majority of
the ETFs issued by these firms rarely traded at premiums or
discounts to NAV of just one or two percent, let alone more.
Also forgotten are the reasons why ETF volume increases in
conjunction with market volatility.
"When volatility increases, people use ETFs more for both
portfolio protection and for new positioning," said WisdomTree Head
of Capital Markets David Abner
in a note last week
. "This is why volumes in ETFs increase in a manner directly
correlated to volatility. I believe ETFs continue to prove
themselves as a product innovation useful to a large section of the
Weidman adds an important point.
"The ETF price can become the true price for that market, and
the underlying assets may eventually catch up with any gap between
the two (called a "premium" or "discount"). This is a main reason
that so many investors large and small opted to use ETFs during
last month's volatility."
Ultimately, it is not ETFs that investors need to fear. Rather,
the more alarming issue is how many investors are being scared out
of the asset into inferior, higher-cost, often lower return
products because of a few fear-mongering headlines.
For more on ETFs, click
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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