ETFs stand up to COVID-19 pressure

Exchange traded funds (ETFs) have been put under pressure during COVID-19, but, so far, no Australian ETFs have closed or become unavailable for their primary activity.

However, the market slump and price dislocation experienced over February and March put the stockmarket under stress, and ETFs exhibited some volatility in pricing in line with the structural setup of the assets or indices.

Kanish Chugh, co-head of sales at ETF Securities, said ETFs delivered what they were meant to do in any circumstance.

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“The primary task of an index-tracking fund is to basically give investors the fall – and rebound – of their underlying indices, and overall, the broad index-based ETFs have done this,” Chugh said.

Spreads on ETFs were wider than usual during the current volatility, but this was to do with the market movements of the exposures.

For example, the iShares S&P 500 ETF spread jumped 15 basis points in March from an average of four basis points in February, which reflected that on several occasions in March, US stock index futures stopped pricing.

“This ‘gapping risk’ is possible and it was borne out in March, but the market-makers still maintained pricing on the ETFs,” Chugh said.

“Now, that’s their job, but it does involve them using their modelling techniques and doing everything they can from their side to accurately reflect the prices, and take that risk on to their balance sheet.

“But they were able to give investors the ability to buy or sell on the ASX [Australian Securities Exchange].

“If the bid/offer spread on any index widens, that of an ETF based on it will react; say it’s the MSCI Emerging Markets Index, and the spread surges from 30 basis points (0.3%) to 90 basis points (0.9%), you would expect a tripling of the ETF’s spread too, at a minimum. This is what the ETF is meant to do.” 

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