IEUS - Global ETF Market Facts: 3 Things To Know From Q1 2023
2023-04-14 03:00:00 ET
Summary
- Most ETF trading activity occurs in the secondary market, where ETF shares change hands between buyers and sellers.
- March 2023 saw a number of shocks to global financial markets, including bank bailouts and the prolonged effects of a heightened interest rate environment.
- Investors have increasingly turned to ETFs to access fixed-income exposure.
By Samara Cohen
Three Things To Know From Q1 2023
- Exchange-traded funds (ETFs) remain a fraction of the total global financial market in both equities and fixed income, ranging from 4.1% - 12.7% of equities and 0.3% - 2.7% of fixed income assets by region. 1
- U.S. ETF trading volume as a percentage of total U.S. equity volume reached nearly 40% (versus an average of 32% in 2022) when the CBOE Volatility Index (VIX), a common proxy for U.S. equity market volatility, spiked to higher levels in March. 2
- An uptick in interest rate volatility has led to outsized trading in US Treasury ETFs, which traded nearly 13% more than their 2022 averages in Q1, setting a quarterly record and providing further evidence that investors increasingly turn to ETFs to navigate stressed markets. 3
ETF Market Size
Globally, assets under management in ETFs are only a fraction of the total financial market. ETFs represent 12.7% of equity assets in the U.S., 7.8% in Europe, and 4.1% in Asia-Pacific. Market share is smaller in fixed income, where ETFs account for 2.7% of fixed income assets in the U.S., 1.7% in Europe, and 0.3% in Asia-Pacific ( Figures 1, 2, and 3 ).
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Chart Description: Column charts showing the size of equity and fixed incomes ETF assets under management in comparison to the total equity market capitalization and total debt outstanding in the U.S., Europe, and Asia-Pacific. This chart shows that while ETFs represent a large dollar amount of assets, that amount is still small in comparison to both the equity and fixed-income markets.
ETF Trading Volumes
In the first quarter of 2023, average daily trading volumes for U.S. equities and U.S. ETFs were $519.2 billion and $162.2 billion, respectively. This means that U.S. ETFs accounted for 31.4% of the total U.S. composite volume in the secondary market over the quarter.
The average daily trading volume in European equities was $93.1 billion, while the average daily trading volume in European ETFs was $10.5 billion. This means that secondary market trading in European-domiciled ETFs accounted for 11.3% of total European cash equities over the quarter.
In Asia-Pacific, ETFs accounted for 12.6% of the total composite volume in the secondary market in the quarter, with Asia-Pacific equities and ETFs trading $144 billion and $18.1 billion, respectively ( Figures 4, 5, and 6 ).
Figures 4-6: ETFs as a percentage of total equity trading volume (% average) 16
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Chart description: Column charts showing ETF trading as a percentage of overall equity market trading volumes in the U.S., Europe, and Asia-Pacific. This chart shows that ETF trading volume as a percentage of the equity trading volume was significantly higher than in previous years as investors continue to trade ETFs at an increasing rate.
Most Trading Activity Occurs In The Secondary Market
Most ETF trading activity occurs in the secondary market, where ETF shares change hands between buyers and sellers. When demand cannot be met in the secondary market, large institutions (known as "authorized participants") can transact with ETF issuers to create or redeem ETF shares in a separate, "primary" market.
In the first quarter of 2023, the ratio of secondary market activity to primary market activity in the U.S. was 9:1. This means that for every $9 of ETFs traded, only $1 resulted in trading activity in the underlying securities. In Europe, this ratio was 2:1, and in Asia-Pacific, it was 5:1 ( Figures 7, 8, and 9 ).
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Chart description: Column chart showing the amount of ETF trading in the secondary market compared to the amount of primary market activity in the U.S., Europe, and Asia-Pacific. The amount of secondary market activity is far greater than primary activity, which means that most ETF trading takes place on an exchange between buyers and sellers and does not impact the underlying securities of the ETF.
iShares Secondary Market Trading Stats
In the first quarter of 2023, the average daily trading volume in U.S. iShares ETFs was $39.6 billion, up from an average of $38.7 billion in Q4 2022.
In Europe, the average daily trading volume in iShares ETFs was $4.9 billion, up from an average of $4.5 billion in Q4 2022.
In Asia-Pacific, the average daily trading volume in iShares ETFs was $0.13 billion, in line with the Q4 2022 average ( Figure 10 ).
Figure 10: Average daily volumes for iShares ETFs 20
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Chart description: Column chart showing the average daily volume ((ADV)) of ETF trading in the U.S., Europe, and Asia-Pacific in Q1 2023. Volumes have generally increased in comparison to Q4 2022 but remain slightly lower than the 2022 averages.
Bid-ask spreads (a component of trading costs for investors), are impacted by factors such as liquidity, volatility, and the efficiency of the ETF ecosystem.
In Q1, bid-ask spreads in U.S. iShares ETFs tightened to 12.4 basis points (bps), on average. In European-listed iShares ETFs, spreads tightened to 14.8 bps on average, and in Asia-Pacific-listed iShares ETFs, spreads tightened to 21.5 bps on average ( Figure 11 ).
Figure 11: Average iShares ETF bid-ask spreads (bps) 21
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Chart description: Column chart showing the average bid-ask spread (a component of an ETF's trading cost) for iShares ETFs in the U.S., Europe, and Asia-Pacific. Bid-ask spreads tightened globally compared with Q4 2022
ETF Flows Typically Have Minimal Impact On Stocks
Investors can assess the impact of primary market activity on the prices of underlying stocks through a metric called "imputed flow." This metric estimates the proportion of all stock trading that results from ETF creations or redemptions; meaning, imputed flow is an approximation of how much stock trading is generated by ETF inflows and outflows.
The impact is typically modest. From March 2021 through March 2023, approximately 5.3% of trading volume in U.S. equities has been attributable to ETF activity, while in Europe, just 1.9% of trading in individual European stocks has been attributable to ETF flows. In Asia-Pacific, this figure is 1.3% ( Figures 12, 13, and 14 ).
Figures 12-14: Percentage of stock trading as a result of ETF flows 22
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Chart description: Line charts showing both the total and average imputed flow in the U.S., Europe, and Asia-Pacific. Imputed flow is an estimation of how stock trading is generated by ETF inflows and outflows. The charts show that imputed flow is below 5.5%, on average, in all regions.
Case Study: High-velocity markets in Q1 2023
- Global financial markets experienced increased turbulence in March 2023, as the Cboe Volatility Index ((VIX)), often referred to as the equity market's "fear gauge," and the MOVE Index, a measure of interest rate volatility, both reached elevated levels. 23
- Despite this volatility, trading in ETFs remained orderly. Data from this period suggest that, as in prior bouts of market stress, investors increasingly turned to ETFs to access markets and most ETF trading activity took place in the secondary market with limited impact to underlying securities.
Elevated ETF Trading Activity Around The Globe
March 2023 saw a number of shocks to global financial markets, including bank bailouts and the prolonged effects of a heightened interest rate environment. This translated to elevated VIX Index levels and significant declines for certain segments of the market, including U.S. regional bank stocks. 24
Historically, ETF volumes have tended to rise in periods of market stress as investors increasingly use ETFs to allocate capital and manage risk. This is exhibited through an increased positive correlation between VIX Index levels and U.S. ETF trading volume as a percentage of total U.S. equity volume ( Figure 15 ).
Figure 15: VIX Index correlation to U.S. ETF/equity ratio 25
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Chart description: Column chart showing the correlation between the VIX Index levels and U.S. ETF trading volume as a percentage of total U.S. equity volume since January 1, 2019. Historically, ETF volumes have tended to rise in periods of market stress as investors increasingly use ETFs to allocate capital and manage risk.
This correlation was particularly apparent on trading days that coincided with large market events. For example, on days with more than 50 aggregate single stock trading halts (spread across multiple securities) on U.S. exchanges, U.S. ETF volumes as a percentage of total equity volumes spiked ( Figure 16 ).
Figure 16: U.S. ETFs as a percentage of total equity trading volume during March 2023 26
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Chart Description: Line chart showing average daily volumes of U.S. listed ETFs in March 2023. This chart shows that ETF trading volume as a percentage of total equity trading volume was significantly higher on days with large amounts of stock trading halts on U.S. exchanges.
ETFs As "Shock Absorbers"
Secondary market trading of ETFs is typically a multiple of the primary market, or creation and redemption, activity. For the three-year period that ended March 31, 2023, the secondary-to-primary ((STP)) ratio for U.S.-listed ETFs was 9:1. In Europe and Asia-Pacific, this ratio was 3:1 and 4:1, respectively.
Despite elevated volatility, the STP ratio for U.S.-, Europe-, and Asia-Pacific-listed ETFs in March 2023 was largely in line with averages. This provides further evidence that even in times of stress, the majority of ETF trading doesn't result in the trading of underlying securities as buyers and sellers transact on exchange at real-time prices. ( Figure 17 ).
Figure 17: Global ETF STP ratios in volatile markets 27
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Chart Description: Column chart showing the amount of ETF trading in the secondary market compared to the amount of primary market activity in the U.S., Europe, and Asia-Pacific over the last three years and during volatile market periods like March 2020 and March 2023. The amount of secondary market activity is far greater than primary activity, which means that most ETF trading takes place on an exchange between buyers and sellers and does not impact the underlying securities of the ETF, even in times of market stress.
A Closer Look At Fixed Income ETFs
Investors have increasingly turned to ETFs to access fixed-income exposure. 28 There was a notable year-over-year increase in fixed-income ETF volumes in 2022, and volumes remained high in Q1 2023 during which ADV for global fixed-income ETFs was $32.4 billion, the third highest quarterly figure on record. 29
A new interest rate regime and disruptions in the global banking system provided additional tailwinds for greater use of US Treasury ETFs. For example, US Treasury yields saw some of the largest moves in history in Q1, at which time global US Treasury ETFs reached record volumes for a quarter ($525 billion). iShares Treasury ETFs accounted for nearly 66% of this activity.
Additionally, the MOVE Index reached levels in March that were last seen during the Global Financial Crisis. 30 As a result, investors were particularly active in US Treasury ETFs as they looked to defensively position their portfolios. ( Figure 18 ).
Figure 18: Average daily volume for global iShares US Treasury ETFs 31
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Chart Description: Column chart showing the average daily volume ((ADV)) of global iShares US Treasury ETFs. Volumes have notably increased since 2022 and Q1 2023 represented the highest quarterly ADV on record.
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1 See Figures 1, 2, and 3.
2 The Cboe Volatility Index ((VIX)) is a real-time index that represents the market's expectations for the relative strength of near-term price changes of the S&P 500® Index (SPX). Because it is derived from the prices of SPX index options with near-term expiration dates, it generates a 30-day forward projection of volatility. Volatility, or how fast prices change, is often seen as a way to gauge market sentiment, and in particular the degree of fear among market participants. As of March 31, 2023. Source: Bloomberg, BlackRock.
3 The ICE BofA MOVE Index is a well-recognized measure of U.S. interest rate volatility that tracks the movement in U.S. Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year, 5-year, 10-year, and 30-year Treasuries. As of March 31, 2023. Source: Bloomberg, BlackRock, big xyt.
4 This reflects the size of the U.S. equity market (ex-ETFs). As of March 31, 2023. Equity (ex-ETFs) represented by the market capitalization of the Russell 3000 Index. Source: Bloomberg.
5 This reflects the size of the U.S.-listed equity ETF market. As of March 31, 2023. Source: BlackRock, Markit.
6 This reflects outstanding debt issued by the residents of the U.S. As of September 30, 2022. Source: Bank for International Settlements ((BIS)).
7 This reflects the size of the U.S.-listed fixed-income ETF market. As of March 31, 2023. Source: BlackRock, Markit.
8 This reflects the size of the European equity markets (ex-ETFs). As of March 31, 2023. Equity (ex-ETFs) represented by the market capitalization of STOXX Europe 600 Index. Source: Bloomberg.
9 This reflects the size of the Europe-listed equity ETF markets. As of March 31, 2023. Source: BlackRock, Markit.
10 This reflects outstanding debt issued by the residents of the Euro area. As of January 31, 2023. Source: European Central Bank.
11 This reflects the size of the Europe-listed fixed-income ETF market. As of March 31, 2023. Source: BlackRock, Markit.
12 This reflects the size of the Asia-Pacific equity markets (ex-ETFs). As of March 31, 2023. Equity (ex-ETFs) represented by the market capitalization of the MSCI Asia Pacific All-Country Index. Source: Bloomberg.
13 This reflects the size of the Asia-Pacific-listed equity ETF markets. As of March 31, 2023. Source: BlackRock, Markit.
14 This reflects outstanding debt issued by the residents of Australia, China, Hong Kong, Japan, Malaysia, Philippines, Singapore, and Thailand. As of September 30, 2022. Source: Bank for International Settlements ((BIS)).
15 This reflects the size of the Asia-Pacific-listed fixed-income ETF markets. As of March 31, 2023. Source: BlackRock, Markit.
16 As of March 31, 2023. Source: BlackRock, Markit, Cboe Global Markets, big xyt.
17 As of March 31, 2023. Source: Bloomberg, BlackRock.
18 As of March 31, 2023. Source: Bloomberg, BlackRock, Markit, big xyt.
19 As of March 31, 2023. Source: Bloomberg, BlackRock.
20 As of March 31, 2023. Source: Bloomberg, BlackRock, Markit, big xyt.
21 A basis point ((BP)) is one-hundredth of one percent. As of March 31, 2023. Source: TAQ Refinitiv.
22 As of March 31, 2023. Source: Bloomberg, BlackRock.
23 As of March 31, 2023. Source: Bloomberg, BlackRock.
24 To address extraordinary market volatility in U.S. equity markets, U.S. national securities exchanges have enacted Limit Up/Limit Down (LULD) thresholds which prevent individual securities from trading +/- 5% (or +/- 10% in the case of thinly traded securities) in a short period of time. LULD protocols will halt trading in the security for a 5-minute period if it approaches these levels.
25 As of March 31, 2023, based on daily values since January 1, 2019. Source: Bloomberg, BlackRock.
26 Reflective of aggregate number of single stock trading halts on U.S. exchanges. As of March 31, 2023. Source: Bloomberg, BlackRock, NYSE.
27 As of March 31, 2023. Source: Bloomberg, BlackRock, big xyt.
28 Source: Investment Company Institute " 2022 Investment Company Fact Book ".
29 As of March 31, 2023. Source: Bloomberg, BlackRock, big xyt.
30 As of March 31, 2023. Source: Bloomberg, BlackRock.
31 As of March 31, 2023. Source: Bloomberg, BlackRock, big xyt.
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Global ETF Market Facts: 3 Things To Know From Q1 2023