ETFs have ‘negligible impact on volatility’

Exchange-traded funds (ETFs), have negligible impact on market volatility, according to research from Vanguard investment management company.

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Exchange-traded funds (ETFs), and leveraged ETFs in particular, have negligible impact on market volatility, according to research from Vanguard investment management company.

Joel Dickson, senior investment strategist at Vanguard, claimed that the growth of ETFs and the increase in volatility in equity markets was a case of correlation but not causation.

The controversy over ETFs has picked up recently as their exposure has increased in the UK and Europe, though they are still more prevalent in the US, where they made up 11.4 per cent of the fund market at the end of the second quarter this year, according to research by Cerulli.

Leveraged or inverse ETFs have come under particular scrutiny, with the Securities and Exchange Commission (SEC), the US regulatory body, reportedly investigating their use.

However, Dickson pointed out that leveraged ETFs were ‘merely a drop in the water’ when it came to equity markets generally and to the cash flow of ETFs in particular.

Last year, leveraged ETFs in the US made up only 4.2 per cent of the total cash flow from ETFs, generating $5 billion (£3.2 billion), though that increased to 7.2 per cent through the first half of this year, according to research from Vanguard, Bloomberg, AMEX and Simfund.

However, many leveraged ETFs are exposed to fixed income investments, and recent studies from Credit Suisse and Morningstar have concluded that ‘leveraged ETFs had no real impact on overall volatility’.

Dickson also dismissed the worries behind synthetic ETFs, which simulate the process of ETFs by using derivatives such as swaps.

He claimed, ‘Synthetic risk is massively overrated. ETFs are essentially just tracker funds that provide access to broad-based asset classes, not dissimilar to investment trusts.’

Dickson did admit that the increasing product innovation around ETFs means that more work needed to be done to educate investors about ETF structures and how they work.

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