EUR 399.00 For Business Accounts Only

ETF Behaviour in Bear Markets

​Assets invested in ETF/Ps comprise around $3 trillion globally. Put simply the new funds flowing into ETFs vs. traditional mutual funds is at a 100:1 ratio and in terms of AUM is on par with total hedge fund assets which have been in existence for 3 times as long. Although ETF products have been around for a quarter of a century, they have only really started to become meaningful since Lehman Shock. However ETFs, despite increasing levels of sophistication, have brought about higher levels of market volatility. Studies have shown that a one standard deviation move of S&P500 ETF ownership carries 21% excess intraday volatility. Regulators are also realising that limit up/down rules are exacerbating risk pricing and are seeking to revise as early as October 2015. In less liquid markets excess volatility has proved to be 54% higher with ETFs than the actual underlying indices. As more bearish market activity has arrived since August 2015 we investigate how ETFs may impact given a large part of recent existence has been under more favourable conditions. We also look at the real excess volatility of leveraged funds which in one case has average returns of +/- 10x versus its 3x product description. We also look at the ETF phenomenon increasing the irrelevance of sell-side ratings and targets but hypothesise a rebirth in the sell-side should a collapse in ETF confidence drive a return to active management.