A look back at the ETF trading markets from last week helping you better understand the ETF market and how ETFs trade on the exchanges brought to you by the FlexShares Capital Markets Group.
Written by Edward Rosenberg, Head of ETF Capital Markets and Analytics, and Marko Lazic, Capital Markets Analyst.
This past week saw global yields jump as fears increased that the Fed might hit markets with a surprise rate hike and inaction by the European Central Bank (ECB) on additional stimulus. It is our opinion that the ECB’s inaction can be taken as a sign that policy makers did not see any immediate consequences coming from Britain’s vote to leave the European Union. The S&P 500 finished down 2.45% Friday, suffering its first -1%+ loss in several months and the VIX jumped over 40% after hovering near multi-year lows.
In the commodities space, crude oil ended the week stronger as Russian and Saudi Arabian energy ministers announced plans to support stability in the oil market. Although no definitive agreement was signed, discussions were favorable for a freeze on output. Gold saw a modest increase and the US Dollar weakened slightly against other world currencies. Going forward, investors are concerned about an increase in interest rates and that concern will remain a dominant theme.
According to Morningstar, volume in multiple sectors saw an increase on the surge in overall volatility, we believe particularly ETF volumes increased as they represent a greater percentage share of all US volume traded on the exchanges. In general, this has historically been the case as ETFs are used as macro-thematic trading vehicles in times of rising volatility. Allocation strategies saw the biggest increase in volumes.
US Equity was the most traded category, with volume on exchanges being split between both buying and selling. Within this category, Mid-Cap Blend and Small Value funds experienced more buying then selling with investors investing in U.S. Equity funds. Within the Sector Equity group, global real estate and domestic real estate categories experienced the most selling pressure while infrastructure, equity precious metals, and natural resources had investor demand.
In the International Equity category, Diversified Pacific/Asia strategies were under pressure with Europe Stock strategies not too far behind as both areas continue to face selling pressure. Meanwhile, Foreign Small/Mid Value, Blend, and Growth strategies saw the highest percentage of buy side volume. Based on exchange-traded volumes, it appears that Small and Value strategies have been preferred both domestically as well as abroad.
Taxable Bonds experienced an uptick in volume, with investors broadly selling the ultrashort bond and bank loan strategies categories. Finally, the commodities category also experienced continued selling dominated by selling in industrial metals and broad basket categories.
Trading in FlexShares funds experienced a large increase in volume week over week, which was driven by a large investment in GUNR. The taxable bond category saw the most selling by investors including trading in RAVI, MBSD, SKOR, LKOR, TDTT, and TDTF. GUNR, GQRE, and NFRA saw increases in volume. We believe this underscores demand for broad-based risk-management strategies as volatility potentially goes higher.
Futures are contracts that trade on an auction market in which participants buy and sell commodity and futures contracts for delivery on a specified future date.
ADV (Average Daily Volume) is the number of shares a security is traded each day averaged over some length of time.
Bloomberg Index definitions
Standard and Poor's 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The index was developed with a base level of 10 for the 1941-43 base period.
Russell 2000 Index is comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 8% of the Russell 3000 total market capitalization. The index was developed with a base value of 135.00 as of December 31, 1986.
MSCI EAFE Index is a free-float weighted equity index. The index was developed with a base value of 100 as of December 31, 1969. The MSCI EAFE region covers countries in Europe, Australasia, Israel, and the Far East.
MSCI EM (Emerging Markets) Index is a free-float weighted equity index that captures large and mid-cap representation across Emerging Markets (EM) countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country.
Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency).
Bloomberg Commodity Index is calculated on an excess return basis and reflects commodity futures price movements. The index rebalances annually weighted 2/3 by trading volume and 1/3 by world production and weight-caps are applied at the commodity, sector and group level for diversification. Roll period typically occurs from 6th-10th business day based on the roll schedule.
WTI is the price of crude oil light, commonly referred to as "oil" in the Western world. West Texas Intermediate (WTI) crude oil is the underlying commodity of the New York Mercantile Exchange's oil futures contracts and is utilized as an oil benchmark.
Gold is quoted at a price of 1 troy ounce of .999 percent fine gold deliverable now. This means you can usually purchase one ounce of gold bullion at this price plus the dealer's premium.
US 10-Yr Yield index indicates the yield of the US Treasury bond market with a maturity of 10 years. The rates are comprised of generic United States government bill/note/bond indices.
U.S. Dollar Index indicates the general international value of the US dollar. The index does this by averaging the exchange rates between the US dollar and other major world currencies.
Bloomberg Barclays TIPS 1-10 year index measures the performance of the US Treasury Inflation Protected Securities (TIPS) market with maturities ranging between 1 and 10 years.
The Chicago Board Options Exchange Volatility Index (VIX) reflects a market estimate of future volatility, based on the weighted average of the implied volatilities for a wide range of strikes. 1st & 2nd month expirations are used until 8 days from expiration, then the 2nd and 3rd are used.
Morningstar Category definitions
Diversified Emerging Markets: Diversified emerging-markets portfolios tend to divide their assets among 20 or more nations, although they tend to focus on the emerging markets of Asia and Latin America rather than on those of the Middle East, Africa, or Europe. These portfolios invest predominantly in emerging market equities, but some funds also invest in both equities and fixed income investments from emerging markets.
Equity Precious Metals: Precious-metals portfolios focus on mining stocks, though some do own small amounts of gold bullion. Most portfolios concentrate on gold-mining stocks, but some have significant exposure to silver-, platinum-, and base-metal-mining stocks as well. Precious-metals companies are typically based in North America, Australia, or South Africa.
Volatility: Volatility strategies trade volatility as an asset class. Directional volatility strategies aim to profit from the trend in the implied volatility embedded in derivatives referencing other asset classes. Volatility arbitrage seeks to profit from the implied volatility discrepancies between related securities.
Large Blend: Large-blend portfolios are fairly representative of the overall US stock market in size, growth rates and price. Stocks in the top 70% of the capitalization of the US equity market are defined as large cap. The blend style is assigned to portfolios where neither growth nor value characteristics predominate. These portfolios tend to invest across the spectrum of US industries, and owing to their broad exposure, the portfolios' returns are often similar to those of the S&P 500 Index.
Trading – Leveraged Equity: These funds seek to generate returns equal to a fixed multiple of the short-term returns of an equity index. The compounding of short-term returns results in performance that does not correspond to those of investing in the index with external leverage. For example, a fund attempting to achieve 2 times the returns of a given index on a daily basis is unlikely to deliver anything like 2 times the index’s returns over periods longer than one day. Many of these funds seek to generate a multiple of the daily or weekly return of the reference index. Trading funds are not considered suitable for a long-term investor and are designed to be used by active traders.
Trading – Inverse Equity: These funds seek to generate returns equal to an inverse fixed multiple of short-term returns of an equity index. The compounding of short-term returns results in performance that does not correspond to those of investing in the index with external leverage. For example, a fund attempting to achieve negative 2 times the returns of a given index on a daily basis is unlikely to deliver anything like negative 2 times the index’s returns over periods longer than one day. Many of these funds seek to generate a multiple typically negative 1 to negative 3 times the daily or weekly return of the reference index. Trading funds are not considered suitable for a long-term investor and are designed to be used by active traders.
Commodities Energy: Energy portfolios invest in oil (crude, heating, and gas), natural gas, coal, kerosene, diesel fuel, and propane. Investment can be made directly in physical assets or commodity-linked derivative instruments.
Financial: Financial portfolios seek capital appreciation by investing primarily in equity securities of U.S. or non-U.S. financial-services companies, including banks, brokerage firms, insurance companies, and consumer credit providers.
Miscellaneous Region: Miscellaneous Region stock portfolios invest in countries or smaller regions that do not have their own category. They typically have a narrow geographical range.
Equity Energy: Equity energy portfolios invest primarily in equity securities of U.S. or non-U.S. companies who conduct business primarily in energy-related industries. This includes and is not limited to companies in alternative energy, coal, exploration, oil and gas services, pipelines, natural gas services, and refineries.