ETFs: “F” for Liquidity

A very interesting article in Barrons about the role ETFs — Extremely Troublesome Funds — played in the May 6th flash crash. It seemed the usual liquid, widely traded funds had a sudden and unexpected vulnerability, as liquidity dropped steeply, and bids faded away.

“ETFs represented 70%, or 227, of the 326 securities for which trades were cancelled by the exchanges, owing to a price drop of 60% or more, according to a recent joint report issued by the SEC and the Commodity Futures Trading Commission. That was after many exchange-traded funds lost ground, along with stocks, earlier in the day because of the problems in Europe caused by Greece.

Investment Technology Group, an electronic broker and tech firm, says that, at the height of the flash crash, the returns of some ETFs decoupled from the underlying basket of stocks that they track. Some underperformed the underlying portfolios by more than 60% . . .

So how bad is the damage to the reputation of exchange-traded funds? Consider some ETF trading details:

• The ETF sector saw net inflows last month of $6.3 billion, half of April’s $12.7 billion.
• Total ETF assets fell to $798.4 billion on May 31, from $847.4 billion a month earlier.
• Biggest loser was PowerShares QQQ (QQQQ), the Nasdaq 100 ETF, which suffered worst-in-show outflows of $2.4 billion, lowering its assets to $18.4 billion.
•  SPDR Gold Shares ETF (GLD) gained $4.2 billion in assets last month total = $49.2 billion).
• Pimco’s Enhanced Short Maturity Strategy Fund (MINT), an actively managed money-market proxy pulled in $596.4 million. (total assets = $1.55 billion; a 50% increase over April’s total)
• Pimco now is the 15th-biggest ETF firm, up from 19th in April.
• Vanguard gained $2.49 billion in net assets (total = $103.1 billion) they are third in total assets.
• MSCI Emerging Markets ETF (VWO) added $2 billion of assets (total = $23.94 billion, 5th-biggest U.S. ETF).
• BlackRock (BLK), iShares’ parent, saw redemptions of $1.3 billion in May (Total = $368.24 billion in assets; #1 in the exchange-traded fund world).

Interesting stuff . . .


ETFs Get an “F” for May 6 Liquidity
Barron’s June 5, 2010

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