iShares: ETFs Behaving as Expected


The June market maelstrom that saw some marquee ETFs, such as the iShares MSCI Emerging Markets Index Fund (NYSE:EEM), move noticeably away from its net asset value and some banks stop taking redemption orders set off a flurry of predictable history.

In recent years, ETFs have become a favorite whipping boy for the ill-informed to blame market meltdowns on. Investors always love to know why something goes astray in financial markets, and some organizations have served up ETFs on a silver platter as the asset to class to blame for everything from down markets to global warming.

Continue Reading Below

Well, ETFs have not yet been blamed for global warming, but it might just be a matter of time.

The reality is ETFs, even amid increased market volatility, have mostly been behaving as expected. BlackRock's (NYSE:BLK) iShares unit, the world's largest ETF issuer, highlights as much.

"During the market volatility of the past few weeks, ETFs performed precisely as they are designed to do. Despite extreme stress in underlying markets, ETFs in many cases performed better than ever in allowing investors to move quickly and efficiently in and out of investment exposures," said Global Head of iShares Mark Weidman in a note to the firm's clients.

Naysayers may be quick to point out that iShares is merely protecting its own interests. That is probably true, but BlackRock is the world's largest asset manager and ETFs are far from the company's only line of business. More importantly than any company defending its products when those products are assailed with opinion not facts is that iShares and other ETF sponsors have realized that now is the ideal time to educate investors about the inner workings of ETFs.

For its part, iShares is planning to roll out an investor education program. Sure, that could benefit the firm, but investors that have been tricked into thinking ETFs are the scourge of financial markets could be the real beneficiaries. More information means more informed investors and better decision-making and those factors should be hallmarks of efficient capital markets.

Of course, investors of all stripes want to know that when market volatility spikes that they will be able to move in and out of ETFs at a moment's notice. Weidman notes that iShares does business with 45 authorized participants that create and redeem ETF shares. Last week, iShares reconfirmed that it is business as usual at all 45 firms.

That may not be enough to assuage those investors that are alarmed by some ETFs occasionally veering away from NAV. In the wake of those concerns, Benzinga examined just how often ETFs move noticeably away from the underlying NAV. iShares and PowerShares funds, combined roughly 20 percent of the total U.S. ETF universe, were examined, and the fact is the vast majority of the ETFs issued by these firms rarely traded at premiums or discounts to NAV of just one or two percent, let alone more.

Also forgotten are the reasons why ETF volume increases in conjunction with market volatility.

"When volatility increases, people use ETFs more for both portfolio protection and for new positioning," said WisdomTree Head of Capital Markets David Abner in a note last week. "This is why volumes in ETFs increase in a manner directly correlated to volatility. I believe ETFs continue to prove themselves as a product innovation useful to a large section of the investment community."

Weidman adds an important point.

"The ETF price can become the true price for that market, and the underlying assets may eventually catch up with any gap between the two (called a premium or discount). This is a main reason that so many investors large and small opted to use ETFs during last month's volatility."

Ultimately, it is not ETFs that investors need to fear. Rather, the more alarming issue is how many investors are being scared out of the asset into inferior, higher-cost, often lower return products because of a few fear-mongering headlines.

For more on ETFs, click here.

(c) 2013 Benzinga does not provide investment advice. All rights reserved.