Two Ways ETFs Shine in Chaotic Markets


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By Christian Magoon
CEO, Magoon Capital 

Across the world, markets are in chaos. The U.S. is dealing with a variety of poor economic reports that suggest the economy is getting worse. The Eurozone has successfully won another political battle in Greece but the war against the debt crisis is still raging. Perennial growth engines like China and India are slowing. China cut interest rates this month in an effort to cushion their economy from a hard landing. India is on the verge of their sovereign debt descending into junk bond status by ratings agency S&P. Quite simply the markets are chaotic for investors. During times like this however, two features of the ETF vehicle illuminate the perils of the markets and allow investors to better navigate them.


When markets become chaotic it becomes important for investors to know what they own. In fact some would say it is even more important to know what they don't own. The majority of ETFs are transparent, meaning their underlying holdings can be viewed 24 hours a day and seven days a week. That transparency allows investors to effectively manage and evaluate the risks their portfolio is exposed to.

Want to know the extent of exposure to hot spots like Italy, Greece or Spain within an international ETF?

Just visit the ETF's website to see the weightings as of market close. Here's the iShares S&P Europe 350 Index ETF (IEV) and it's top country exposures as of the last market close on June 15th.

Want to know this same information from an international mutual fund? Visit the mutual fund's website and check the last quarterly, or in some cases, monthly report. Mutual funds are only required to disclose their holdings on a quarterly basis which in this decade seems to be stale information. Indeed investment transparency on a quarterly basis is almost like reading the newspaper once every three months - useless.


The markets are constantly reacting to events around the world as we become more inter connected. Whether it is a Chinese rate cut, Spanish bailout or comments from the Federal Reserve, markets pivot instantly and forcefully. A morning session in the markets can see significant gains. However the afternoon session can experience a catalyst that sends the markets well into negative territory. Investors seeking to control risk, take advantage of market opportunities or need liquidity are well served by the intraday liquidity provided by ETFs. 

Contrast this with mutual funds where investors are boxed into pricing that is determined at market close. Thus an investor placing a buy or sell order in their mutual fund waits minutes or hours for the market close to find out their pricing. In the dynamic times we are living in today, that pricing risk just compounds the uncertainty investors are facing. 

Here's a chart of QQQ, the PowerShares NASDAQ 100 ETF, showing this investor trap as recently as June 13th. Placing a sale order of a technology or growth mutual fund as late as 11:35 in the day would have ended in an unintended result because of end of the day mutual fund pricing. However for ETF investors placing the order at 11:35, the outcome would have been as intended.

ETFs offer investors a variety of features and benefits. Features like transparency and liquidity provide investors an advantage when it comes to managing risk in volatile markets. For that reason, ETFs will continue to shine as markets roil.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , ETFs , Investing Ideas , Mutual Funds
Referenced Stocks: IEV , QQQ

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Christian Magoon

Christian Magoon

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