In 1993, State Street Global Advisors launched the first US-listed exchange traded fund (ETF) to help stabilize markets and improve liquidity during periods of market turbulence. During recent market volatility, ETF trading volume surged relative to overall market volumes, highlighting that ETFs continue to function as intended — as buffers and sources of liquidity in stressed markets.
ETFs: Born in crisis and serving their purpose through crises
In order to understand and evaluate the performance of ETFs during the COVID-19 crisis, it is worth taking a moment to remind ourselves of why and how ETFs ﬁrst came into being.
ETFs were created as a response to the US stock market crash on October 19, 1987, commonly referred to as “Black Monday.” The US Securities and Exchange Commission’s (SEC’s) Division of Market Regulation, in its post-mortem report analyzing the market events of October 19, 1987, found that the systematic selling of stock-index futures by institutional investors had exacerbated the market selloﬀ, and suggested examining whether market basket trading could help stabilize markets in the future. Speciﬁcally, the report suggested that consolidating stock basket trading to a single post “could provide an additional layer of liquidity to the system and cushion somewhat the individual stocks from the intraday volatility caused by program activity.”1 In collaboration with State Street Global Advisors, the American Stock Exchange harnessed this idea, which culminated in the launch of the ﬁrst US-listed ETF in 1993.
More than 27 years later, ETFs have grown into a multitrillion dollar industry, with assets under management (AUM) more than $5.8 trillion as of May 2020.2 More than 7,000 ETFs — utilized by retail investors, institutional investors, asset managers, insurance companies, sovereign wealth funds, and private banks — now trade across many exchanges around the globe. Today, investors use ETFs for a variety of purposes including strategic or tactical asset allocation, cash equitization, transition management, and portfolio hedging, to name just a few. One of the most valuable characteristics of the ETF wrapper is its ability to provide transparent exposure and liquidity to the marketplace throughout the trading day.
The market volatility during the COVID-19 crisis tested, yet again, the eﬃciency of the ETF wrapper and its additive liquidity to the marketplace. In the US, on March 12 and 16, 2020, two of the worst days for the S&P 500® Index since 1987, SPDR ETFs traded more than $100 billion, accounting for more than 16% of US equity market trading volume, demonstrating their utility during a period of extraordinary market volatility.3