For many years, ICI has been at the forefront of efforts to deliver vigorous representation for the interests of exchange-traded funds (ETFs) and the investors who use them. And as the ETF industry faced the reverberations of the COVID-19 pandemic, ICI’s efforts this year around ETF developments were as robust as ever.
Offering New Research in a Crisis
Of particular note is ICI’s work on the experience of ETFs in the COVID-19 crisis. Throughout the summer, ICI conducted a rigorous analysis of how ETFs and their investors reacted during the unprecedented market volatility of March 2020. This research, developed through ICI’s close work with a diverse group of participants in the ETF ecosystem, including ETF sponsors and members of ICI’s ETF committees, shows that the ETF industry proved its resilience. Additionally, ETFs proved their value, acting as a source of stability and an important source of price discovery in the fixed-income market by providing investors with real-time views on the value of underlying bonds.
Investors Turn to ETFs to Quickly and Efficiently Transfer and Hedge Risks in Stressed Markets
Total ETF trading volume and ETF share of US stock market trading volume; daily, January 2–May 29, 2020
Source: Investment Company Institute tabulations of Bloomberg and Cboe Exchange, Inc. data
This figure from the "Experiences of US Exchange-Traded Funds During the COVID-19 Crisis" paper shows that during the market turbulence of March 2020, ETF trading volumes rose—both in absolute terms and as a share of total stock market trading—as investors turned to ETFs to quickly and efficiently transfer and hedge risks.
To build further insight into ETFs’ role in the markets, ICI presented a new video early in the fiscal year rebutting the common misperception that ETFs are one of the culprits during times of market volatility.
Providing Strong Advocacy
During the year, Shelly Antoniewicz, ICI senior director of industry and financial analysis, and Jane Heinrichs, ICI associate general counsel, provided analysis through speaking engagements in both Europe and the United States on a variety of ETF issues, such as the global ETF regulatory landscape, environmental, social and governance (ESG) issues, and the market stress caused by the COVID-19 crisis.
ICI also worked throughout the year to provide data and fact-based analysis to the public and the media—through many interviews with reporters on ETF issues, ICI Viewpoints posts, and Focus on Funds video segments. For example, Antoniewicz provided data and analysis in a March ICI Viewpoints showing that ETFs acted as a relief valve in March for the underlying stock and bond markets by allowing investors to gain or shed risk exposure to various asset classes, and that ETFs did not experience mass redemptions.
As markets navigate the results of the COVID-19 crisis, attention will undoubtedly continue to be focused on ETFs. ICI will also continue its efforts to support the industry in a complex market environment—easing concerns of policymakers and others that ETFs would put additional pressure on the financial system during a crisis.
ETFs are receiving renewed attention because of the recent market volatility caused by the COVID-19 pandemic. Though some analysts claim ETFs have contributed to periods of market volatility, the reality is that they play an important stabilizing role—including during the recent COVID-induced volatility. In a timely video, ICI Senior Director of Industry and Financial Analysis Shelly Antoniewicz debunks the common misperception that ETFs cause market volatility.
Antoniewicz explains that most of the negative commentary arises because of active trading in the secondary market, where investors buy and sell existing ETF shares on an exchange. Yet those trades have no impact on the markets for the securities that make up the ETFs’ portfolios. Analysis of the primary market—where large institutional investors, known as authorized participants, interact with ETFs directly to create and redeem ETF shares—shows that those activities make up a minor share of overall trading. Going back decades, she concludes, every major bout of market volatility was set in motion by a macroeconomic event—with ETFs playing no material role.
This year, ICI’s role as the industry voice on ETF issues advanced through continued growth of the global ETF committee.
The ICI Global Exchange-Trade Fund Committee brought together the major players in the European ETF ecosystem at its second in-person meeting in October in London. The meeting included a session with major European ETF regulators and a session with authorized participants (APs), market makers, electronic trading platforms, and exchange personnel exploring the unique issues of ETF trading in Europe.
This year, ICI also continued its work to help global policymakers better understand ETFs. In this effort, the Institute met with staff at many regulatory and government agencies, including the Autorité des Marchés Financiers and Trésor Public in France; the Financial Conduct Authority in the United Kingdom; and such multinational bodies as the European Securities and Markets Authority, the Financial Stability Board, and the Bank for International Settlements. In these meetings, ICI discussed the ETF structure and provided analysis to help allay perceived concerns about negative effects on the financial markets from these funds.