Mike Venuto and the team behind TETF have written a note on the ETF response to latest market volatility.
Venuto is chairman of the TETF Index Committee and reports that the TETF.Index, the index that underpins the USD6 million ETF Industry Exposure & Financial Services ETF is up 33 per cent since launch in April 2017, against financial indices which have returned 26 per cent over the same period.
Venuto writes that volatility has returned to the markets after historical levels of dormancy. After almost USD77 billion in inflows into ETFs in January, Venuto’s study shows that historically, ETF monthly flows following a market pull back have benefited.
When S&P 500 returns were worse than -6 per cent, the team calculated the average of the following three months ETF flows revealing that ETF flows benefited from market drawdowns.
He writes: “While Mutual Fund flows overall are still higher than ETFs over time, the shift is changing, even in sporadic market pullbacks. It’s clear to see when bigger pullbacks occur, and tax basis is less of an issue for investors, the shift towards ETFs as the preferred vehicle for market investments has grown.
“These findings also end the myth that ETF flows turn negative in a bear market. The data illustrates that during the worst months of the market history, ETF flows respond positively,” he says.
With this standing as the biggest downturn since 2015, Venuto comments that other than the VIX products, which he points out did exactly what they said they would in the prospectus, the ETF industry conducted itself in a very orderly fashion.
“The drops are often the last thing that the mutual fund holdouts need to switch,” he says. “People get complacent when markets are going up but after one or two bad days they do something and they aren’t selling a mutual fund to buy another mutual fund but to buy an ETF because it’s cheaper and transparent.”
Venuto predicts that VIX products will come back but they will be smarter, managing their exposure to the VIX, as opposed to being immersed in it.