The sudden ratcheting up of the coronavirus crisis has made for an anxious couple of weeks on every front—health, family, work and finances—and there’s more uncertainty to come.
For investors, falling markets are never pleasant, even if we know they are a normal part of investing and have faith they will eventually recover.
If you’re looking for additional solace, you can find some in how well exchange traded funds (ETFs) have functioned through all this.
You may recall warnings from certain pundits about the growth of ETFs and other passively managed investments. They argued the huge amount of money pouring into passive investments was distorting markets and would make things much worse in a crisis.
Well, ETFs and other passively managed investments are coming through the stock market’s massive volatility with flying colours.
“This has actually been a great victory for ETFs as a structure,” Dave Nadig, chief investment officer and director of research at ETF Trends, told CNBC. “Everybody’s been concerned in the mainstream media that a big volatility spike like this would unravel some part of the market we didn’t understand. In fact, the opposite has happened.”
Bond ETFs had been of particular concern for some analysts because of the lack of liquidity in some underlying bond issues. However, Samara Cohen, co-head of iShares Markets and Investments, said bond ETFs have performed well through the highly volatile trading of recent days. Where the underlying bond markets have traded sparsely, bond ETFs have provided a mechanism for price discovery where there otherwise wouldn’t be any. This is a huge victory for market efficiency and ETFs.
Wall Street veteran Barry Ritholtz observed it’s been active fund managers who have panicked, dumping investments while retail ETF investors held on and even bought during the downturn.
“If ever there was a situation where the critics have told us passive was destined to fail, this should be it,” Ritholtz writes. “But a funny thing happened on the way to this ‘dangerous, systemic, Marxist bubble’: Nothing.”
As you know, at PWL we use ETFs and other index funds to construct broadly diversified, low-cost portfolios. We never bought into the worries about their viability, having done extensive due diligence on the structure, and now we have yet another occasion to prove they’re sound even in the worst of times.
Meanwhile, central bank and government officials have clearly learned some critically important lessons during the 2007-2008 crisis about stabilizing financial markets.
Authorities in the U.S., Canada and elsewhere have moved quickly to lower interest rates and pump liquidity into the financial system to stabilize key markets while legislators have prepared gigantic economic stimulus packages.
This hasn’t been an easy time for anyone, but it’s reassuring to know that on the financial front, the right moves are being made to keep markets functioning efficiently and positioned for an eventual recovery.