ETFs in times of stress

Close to US$250 billion has poured into Exchange Traded Funds (ETFs) so far this year, and this flow continues unabated. However, prominent active managers such as Howard Marks have questioned who the buyer would be when the market turns. We sat down with Christian Obrist, Head of iShares for Australia to ask about this perceived risk.

In this short interview, Christian explained that this is not a new issue, telling us that: “ETFs have already been battle-tested. If you look at the last 10 years, you've had many events creating market stresses. ETFs have most often come out proving that they function quite well.” Read on for video, with transcript, to hear his view on this risk, as well as some of the benefits ETFs can provide.

iShares has made investing in their international ETFs simpler. Find out more 

Edited transcript

“Diversification is a key attribute of an ETF, but what really stands out is the ease of access and also liquidity. I think liquidity's still very misunderstood, because you have to remember that an ETF has multiple layers of liquidity. It has the liquidity of an index mutual fund, but then because you're putting this index mutual fund on the exchange, it takes on the liquidity of an equity.

So essentially you've got two layers of liquidity. That is very powerful, because you can trade during the day, and you're not limited to just trading at the end of the day.

The fact that there has been product proliferation is great. You're able to move in and out of exposures, and again, we bring up liquidity. The fact that the large and liquid ETFs provide you an avenue to trade very tight spreads, allows you that flexibility to move in and out.

So if markets are changing frequently, the ETF is not just diversified, and low cost from a management perspective, it allows you to move with a low transaction cost as well.

ETFs have already been battle-tested I would say. If you look as far as the last 10 years, you've had many events in the market stresses. ETFs have, most often, come out proving that they function quite well.

I always say that not all ETFs are created equally, and if you do look at the larger ETFs, where a lot of the money goes into, you see that in times of stress, the volumes on exchange tend to rise because investors gravitate to ETFs to find liquidity, and to be able to trade in and out.

And I think because the user type has expanded, and you have a diversification of users, you have a bigger likelihood of finding the other side of the trade on the exchange. So that's really one of the major benefits again.

iShares has made investing in their international ETFs simpler. Find out more