Liquid Alternatives: “ETFs’ Finest Hour” – Dave Nadig

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ETFs a market risk? Far from it, said Nadig on an interview with Barry Ritholtz.

Are stock ETFs a source of risk in the current environment? How did they perform under the weight of enormous flows, both in and out? These and other issues figured in a chat on “The Compound” between ETF Trends CIO and Director of Research Dave Nadig and Barry Ritholtz, Chairman and CIO of Ritholtz Wealth Management. (ETF TRENDS)

How stock ETFs fared in the meltdown triggered by the pandemic

Nadig said stock ETFs behaved perfectly because we did not see any mishaps such as trading hiccups, flash crashes or any disconnects that put investors off 90% fair value. Normal trading days aside, these did not occur even on the three occasions when circuit breakers intervened in the market.

Nadig appreciated that core equity funds did not buckle under the pressure from huge volumes and massive price movement.

“In many ways, it’s been the finest hour for ETFs, as they’ve been able to absorb so much of the money that has come out of mutual funds.”

ETFs smoothly took in the enormous inflows from expected sources such as energy ETFs, and large cap equity reallocations.

Nadig also observed that ETFs had become the barometer of investors’ sentiments. As evidence, ETFs accounted for approximately 45% of the market’s dollar volume during peak volatility days. “Unheard of,” said Nadig.

What about 10-day thousand-point swings, 4-6% moves every day and a runaway VIX?

Nadig brushed aside these concerns, saying the volatility issues affected the market’s niche section of leveraged and inverse ETFs. These made up a minuscule portion ($80 billion) in a huge market ($4 trillion). And the underlying assets were futures, not equities.

About the risk of a re-run of the VIX crisis from 2018:  Nadig said VIX ETFs were the preserve of day-traders, institutional hedges and gamblers.

“There’s more uncertainty there than trying to guess the close on the market today by a longshot because you’re dealing with these pro-cyclicality issues, the futures market, and the opinions of options traders,” said Nadig on VIX. “Still, nobody has any business investing in this. It’s a speculative vehicle designed to capture a certain kind of sentiment in the market. It’s a sentiment indicator that you can put money behind.”

Related Story:  Liquid Alternatives: ETFs Cushioned an Insane Market                                                 

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