Brexit ETF Trading Stays Comfortably Numb by Dave Nadig, FactSet
When markets get frothy, ETFs generally get a lot of heat, in multiple ways. Here’s the literal line from a stump speech I give regularly on the fragile nature of our equity markets:
“When volatility spikes, people generally trade risk-on or risk-off. ETFs are a fantastic way to do that, so we see big spikes in the value traded in ETFs relative to the rest of the equity market during vol-spike days.”
In fact, I use a chart of the August 24, 2015 Flash Crash to illustrate this effect:
Brexit ETF Trading
Honestly, this correlation has been so consistent for so many years, that before I looked, I just assumed that the post-Brexit trading last Friday would be the same way. I also assumed that the selloff from Friday and the ensuing VIX spike would continue. Sometimes it’s really nice to be so wrong.
The Tale of the Tape
First, let’s take a look at what’s actually happened in the S&P 500 and in the VIX.
The S&P stated selling off well before the Brexit vote last Thursday, dropping from 2119 on June 8 to 2071 on June 17, or down 2.26%. That was the setup to Brexit. Vix came up even more substantially in that period, from the 14 range up over 20. As the market believed Brexit would fail, the market spiked and VIX collapsed. Then on the day, June 24, the results came, and VIX spiked as expected:
What happened then surprised people. In yesterday’s continued selloff, the S&P held a practically irrelevant but emotionally significant 2000, and VIX came DOWN. Today’s trading was even more dramatic, with the VIX flat out collapsing towards what many consider the “natural” level of around 20, and the S&P rallying back to stay convincingly over 2000.
So what’s going on? Remember, VIX isn’t the actual volatility of the S&P 500, nor is it some sort of magical hedge against down markets: it’s a formulaic assessment of implied volatility from a strip of liquid S&P 500 options. Put another way, it’s the uncertainty backed into real money betting on (roughly) next-month’s S&P 500 levels. And reading from the last few days’ trading, it’s hard to do much but say “investors and speculators are thinking the impact of Brexit will be, if not positive, at least predictable.”
The Fear Trade in ETFs? Not So Much
So if the markets in general are shrugging off the destabilizing effect of Brexit, ETF traders are essentially ignoring it. While we had a few individual products that had interesting flows (the inverse volatility ETF, XIV, in particular), the actual amount of ETF money betting one way or another on Brexit itself was actually far, far less than I expected.
First, here’s what the share-of-trading looked like:
I was frankly shocked at this. On the same day that markets were down big and the VIX spiked, the dollar value of ETF trading compared to the market actually fell from nearly 30% to under 15%, about as low as it’s been in years. The actual value was similar to previous days – about $67 billion in total turnover – but down from the $69 billion average in the past month. The market as a whole, meanwhile, spiked from trading an average of about $250 billion a day to $573 billion – increased volume that ETFs simply didn’t participate in.
But surely, it must have been a big few days for the speculative parts of the ETF market: the volatility-based products and leveraged and inverse funds?
Nope.
In fact, the non-volatility part of the leveraged and inverse space had a lower than average percent of ETF trading – under 10 percent – where the volatility complex had a completely normal day, and the volatility products are just slightly over the long-term averages, around 5% of ETF trading activity.
Much Ado About Nothing?
While the rest of the world was in Chicken Little mode, the US ETF market simply took it all in stride, without any significant hiccups, and without even any interesting upticks in activity.
So what does that imply? It implies that most of the frothy trading in the markets really came down to individual names. Sure, a few funds had big days – anything related to gold, for instance – but on balance, the biggest economic event since the financial crisis has so far been a complete non-event for the ETF market.
Given the alternative – another potential story like August 24, 2015 – I’ll take the quiet competence.
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