While the recent fallout in the banking sector hit indices last week, some experts say the swings shed light on the efficiency of the exchange-traded fund market.
“The important thing is that despite all the volatility, the stock stops and the ETF continues to trade [and] volumes are rising,” said John Davi, founder and CEO of Astoria Portfolio Advisors Bob Pisani on CNBC”ETF Edge” on Monday. “People look at ETFs as a price discovery tool.
Davi explained that ETFs act as a gatekeeper to how the markets expect the banking sector to perform in situations where investors are uncertain about the performance of a particular financial name being pledged. And because most of the underlying stocks within a bank ETF aren’t actually traded, investors can access liquidity without having to trade individual companies.
“I think plumbing, time and time again, always prevails,” Davi said. “And we’re finding that ETFs are a place to get liquidity and see what the market expects.”
The SPDR S&P Bank ETF (KBE) has fallen nearly 24% since the start of last week, although the fund’s volumes were among the highest ever recorded in its 18-year history. The ETF includes holdings in Silicon Valley Bank.
“Even with the higher volatility, we see that risk is being priced efficiently,” Dan Draper, CEO of S&P Dow Jones Indices, said in the same segment on Monday. “Indices work well, especially in stocks.”
For investors who expect rising interest rates and further market volatility, short-term cash instruments such as SPDR Bloomberg 1-3 Month Treasury Bill ETF (BIL) and iShares Short Treasury Bond ETF (SHV) have seen a large influx since the beginning of the month. On Wednesday, SHV hit a new 52-week high.
Draper said 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 a number of ways.”