While the recent fallout in the banking sector has weighed on indexes this past week, some experts say the swings have shined a light on the efficiency of the exchange-traded fund market.
“What’s important is that despite all the volatility, stocks get halted, the ETF continues to trade [and] volumes go up,” John Davi, founder and CEO of Astoria Portfolio Advisors, told Bob Pisani on CNBC’s “ETF Edge” on Monday. “People look at the ETF as a price discovery tool.”
Davi explained that ETFs act as a bellwether for how markets expect the banking sector to perform in situations where investors are unsure of the performance of a particular financial name that’s halted. And because most of an underlying stock within a bank ETF does not actually trade, investors are able to access liquidity without having to trade individual companies.
“I think the plumbing, time and time again, always prevails,” Davi said. “And we find that the ETF is the go-to place to get liquidity and to see what the market expects.”
The SPDR S&P Bank ETF (KBE) has fallen nearly 24% since the start of last week, although volumes in the fund were among the highest ever recorded in its 18-year history. The ETF includes holdings in Silicon Valley Bank.
“Even though it is higher volatility, we’re seeing risk being priced efficiently,” Dan Draper, CEO of S&P Dow Jones Indices, said in the same segment Monday. “The indices are working well, particularly in equities.”
For investors anticipating rising interest rates and further market volatility, short-term cash instruments like the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) and the iShares Short Treasury Bond ETF (SHV) have garnered heavy inflows since the start of the month. On Wednesday, the SHV hit a new 52-week high.
Draper said that the larger liquidity story remains strong, and that ETFs are a big driver of that story.
“Think about exchange-traded derivatives, futures, options,” he said. “People are trying to price risk. They’re trying to find portfolio insurance in many ways.”