Canadian Investment Review

ETFs in a risk-on, risk-off world

Written by Caroline Cakebread on Wednesday, August 29th, 2012 at 8:21 am

confusing signIn a world where macro-economic issues are driving investment decisions, ETFs have found a new niche according to research by Credit Suisse and reported in the Financial Times. Institutional investors surveyed said they were using ETFs more than they did in the past, particularly to help with portfolio construction in a “risk-on, risk-off” trading environment. Indeed, as Europe teeters on the verge of sovereign default and the U.S. flirts with its own fiscal cliff, ETFs have become a good way to express global views at a time when single stock bets aren’t producing the alpha they used to. Said Phil Mackintosh, global head of trading strategy and Credit Suisse, “In this macro-driven world, it is no surprise that ETF trading has grown to the current high levels of activity representing $1 in $4 traded on the US stock market recently.

According to the Financial Times, the survey was included in a larger report on shrinking US equity trading volumes, which fell to a five year low in July. Stock markets around the world have been hurting as equity trading has slowed in the wake of the 2008 financial crisis. While no one is 100% clear on why equity market volumes are down overall, one theory is that big investors are losing their risk appetite and pulling out of stock: something that many pension funds in Canada are focused on as they shift to LDI strategies and focus on mitigating volatility in their portfolios (we heard this a lot at the 2012 Risk Management Conference last week).

As big investors pull out of stocks, declining interest in equities could also have a longer-term impact on ETFs that track equity indices. In fact ETFs in the US already seeing a slowdown: according to Credit Suisse, the average daily traded value of US listed ETFs in the first seven months of 2012 was down 12% from the same period a year ago. While ETFs are benefiting from volatile macro-economic risk factors, they could also get a boost when things calm down and investors start to get their risk appetite back. When could that happen? That’s the question on everyone’s minds…

Copyright 2017. Canadian Investment Review. All Rights Reserved.