What happened with volatile exchange-traded funds in the August market meltdown in the United States and China? Are they still safe?
Professional money managers say yes, ETFs are safe to invest in. But then again, most pros weren’t hurt by widespread halts in trading among exchange-traded funds.
“It was really only retail investors who were affected,” says Brendan Ahern, a former BlackRock-iShares executive who is now chief investment officer at New York-based KraneShares. “For institutions, this [ETF crash] was a nonevent. It hurt retail investors the most.”
On Aug. 24, about $1.2 trillion of U.S. market value was briefly erased before prices recovered. More than 1,000 listings were halted, mostly among ETFs, according to Bloomberg.
Trading was so disorderly that ETF firms such as State Street, Vanguard, and BlackRock are now huddling with the New York Stock Exchange to prevent a repeat.
“As the second-largest ETF provider, Vanguard will continue to work with regulators and other industry participants on improvement to our market structure rules,” Vanguard spokeswoman Emily White said.
Exchange-traded funds offer advantages: They reprice all day long and can have tax efficiencies.
Timing, however, is everything when buying or selling ETFs.
It’s better to wait until the middle of the day, when traders absorb all the news hitting ETF prices, Ahern says.
Discuss which types of orders are appropriate with your broker. Huge swings between the “bid” and the “offer” prices mean some ETFs are all over the board.
“If you’re transacting at the open, you’re not getting liquidity. Many market-makers aren’t as active in the morning,” Ahern says.
“Market-on-open order types and market-on-close orders really shouldn’t be allowed for ETFs,” he believes. “Most professionals never use those types of orders. They know there’s potential liability.”
Professional investors avoid buying those times and certain types of orders due to the volatility, Ahern adds.
Says Greg Sarian, partner at the Sarian Group at HighTower Advisors in Wayne: “Because of computers, trading is now very unpredictable.”
“Be thoughtful with limit orders vs. market orders, and discuss those with your adviser” before transacting, Sarian says.
KraneShares’ ETFs are geared toward plays on consumption among China’s one billion-plus population. Total assets are roughly $150 million, down from about $280 million prior to the Chinese market crash in August.
KraneShares FTSE Emerging Markets Plus ETF (KEMP) investments include China A Shares (companies listed on the Shanghai and Shenzhen stock exchanges) and China N Shares (NYSE- and Nasdaq-listed companies).
KraneShares Bosera MSCI China A (KBA) is an ETF that tracks the performance of the MSCI China A index. Holdings include industrial and finance names such as China Yangtze Power, China Merchants Bank, and Ping An Insurance Group.
KraneShares CSI China Internet Fund (KWEB) is an ETF tracking the performance of the CSI Overseas China Internet Index. Holdings include dot-com names such as TenCent, Alibaba, Baidu, and JD.com.
Fees for the three ETFs range from 0.68 percent to 0.86 percent annually.
“Earnings among big industrials operating there aren’t doing as well, but there’s an effort to raise domestic consumption in China, so contrast earnings of Nike, which have been very strong,” Ahern says. “Traditional indices in China have very little exposure to the part of what’s doing well in retail sales, which went up 10.5 percent in July and 10.8 percent in August.”
About 10 percent of all consumer goods in China are sold online.
“You wouldn’t build a big-box retailer in China because the Amazon model exists, and a smartphone in China is the dominant source of entertainment and shopping,” Ahern says.
Krane Shares built its KWEB fund as a domestic consumption play, he says, adding that he believes a rebound during the coming holidays will help a recovery in the stocks.
Moreover, China’s stocks are being considered for inclusion in the MSCI Inc. benchmark indexes, which would force many index-following money managers to buy them, which could prompt a dramatic rebound in prices.
That said, these types of ETFs should represent only a small portion of a portfolio, Ahern says.
“I’m all in on China, but no one else should be.”
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