As markets roiled, equity ETFs stayed calm: IIAC

Canadian equity ETFs are weathering the Covid-19 crisis relatively well, but the Investment Industry Association of Canada (IIAC) has some advice for trading in those markets.

In a new report, the IIAC noted that, in terms of trade execution and liquidity, equity ETFs performed well during the crisis.

While equity ETFs did experience some widening in trading spreads at the onset of the crisis in March, spreads had largely returned to normal by the start of April, it said.

And, equity funds also avoided some of the liquidity pressures that roiled fixed-income markets and fixed-income ETFs.

The IIAC also noted that “despite the extreme volatility experienced through the crisis,” the system for creating/redeeming ETFs “appears to have functioned very effectively.”

“Re-balancing did present some challenges during this period of stress, but the trades were able to be executed as required,” it said.

It also pointed to evidence that ETFs made it easier for investors to rebalance their own portfolios, and that functioning ETF markets contributed to price discovery for some underlying equities that were experiencing trading disruptions.

In the wake of the crisis, the IIAC has also identified some best practices for ensuring the best pricing on equity ETFs.

Among other things, it recommends only trading when the underlying equity market is open, using limit orders in volatile markets, and avoiding the first 10 to 15 minutes of the trading day.

“Another lesson that recent ETF performance during the pandemic has taught us is that, to date, the current equity ETF structure in Canada is robust, liquid and functioning well and it does not currently appear to require material changes or additional regulation,” it concluded.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.