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Market sell-off sparks ETF trading spike

iShares recorded significant trading volumes on Tuesday, as markets around the world continued to sell off.

Market sell-off sparks ETF trading spike

Trading in exchange-traded funds (ETFs) spiked during Tuesday’s market volatility, according to global asset manager BlackRock.

Stock markets across the world tumbled on Monday and Tuesday, as investors grew nervous about central bank policy tightening. 

BlackRock, which owns the iShares ETF range, said $8.8 billion (£6.3 billion) had been traded across its Europe, Middle East and Africa (EMEA) ETFs on Tuesday. This is the equivalent to 340% of the average daily volume and dwarfs the $5 billion traded on 24 June, the day after the Brexit vote. However this could be down to new rules (brought in with the MiFID II European Union directive), which mean that all over-the-counter trades must be reported even if they are off-exchange.

Wei Li, head of investment strategy for iShares EMEA, said the flows were two-way, suggesting divergent investor views.

‘As markets were falling, some investors were scoping out “buy-on-dip” strategies, citing strong fundamentals. We believe the slide was mainly driven by an unwinding of popular trades betting on low equity volatility,' Li explained.

‘The pullback could be an opportunity to add risk especially as stretched valuations had been a concern. We favour equities in eurozone, Japan and emerging markets in this environment,’ she added.

The iShares Core S&P 500 (USD) was the most traded ETF during the day, with a total volume of $370 million, followed by the iShares Euro Stoxx 50 ETF (DE) at $349 million.

Volatility spikes

Stock market turbulence hit short volatility exchange-traded notes (ETNs) and ETFs. Short volatility products allow investors to profit when volatility is low. However, they experienced significant falls after volatility spiked this week.

Assets in Credit Suisse’s VelocityShares Daily Inverse VIX Short-Term ETN (XIV) had topped $2 billion in late January, but by the close of Wednesday had fallen to $79.7 million. This was caused by the US market experiencing its worst fall on Monday for more than six years. Year-to-date, Credit Suisse's product is down 94.5%, which has caused the bank to begin an early redemption. ETNs are a type of unsecured, unsubordinated debt security that are issued by an underwriting bank. 

Other short volatility products experienced significant losses. For example, the ProShares Short VIX Short-Term Futures ETF is down 90.5% year-to-date.

Like Credit Suisse, Japanese bank Nomura has also announced plans to close its Next Notes S&P 500 VIX Short-Term Futures Inverse Daily Excess Return Index ETN following a sharp fall in value.

Passive growth

The BlackRock data underscores the growing use of 'passive' ETFs and index funds by investors to gain quick exposure to markets.

During 2017, Morningstar data showed that passive funds enjoyed another year of inflows growing faster than actively managed funds across Europe. The combined inflows to index funds and ETFs reached €162.4 billion, out of a total inflow figure of €682.8 billion, up 14.7% on 2016.

This helped passive funds increase their market share from 15.2% in 2016 to 16% at the end of 2017.

Actively managed funds enjoyed higher inflows in absolute terms, but experienced a lower growth rate of 8.5% year-on-year.

Demand for passives was particularly strong in equities, where equity index funds saw higher inflows than actively managed funds, a trend that has been evident for eight out of the past 11 years. Flows totalled €104.5 billion over the 12-month period.

The popularity of passives did not extend to fixed income, however. During 2017 investors continued to back actively managed bonds funds over their passive equivalents. Here, passive market share only increased by 0.2% to 12%. For example, PIMCO GIS Income was the most popular fund during the year, attracting €41.5 billion in flows.

In the UK, index funds attracted £103 million in 2017, according to the Investment Association, a trade body. This brought the total assets in index trackers up to £165 billion, a 13.5% market share.

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Charles Stanley drops Woodford from fund buy list

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