Market volatility and ETF trading tips

Below are several key ETF trading and execution tactics that investors should keep front of mind given recent events in the market and around the world. 

Market volatility recap

Canadian stocks have never fallen as far and as fast as was seen from late February 2020 to mid-March 2020. During the week of March 9-13, the Canadian market experienced two trading days with drops of 10% and 12% respectively, and March 12 was the biggest one-day percentage drop in over 80 years. While markets rebounded on March 13, they remained very fast, and presented challenges for market participants. In addition to the actual point and percentage drops, both trading velocity and trading volumes have been unprecedented throughout the last three weeks.¹

This was punctuated by several trading halts across U.S and Canadian exchanges. Market structure has been impacted by the dramatic volatility, and market participants have had to adjust to:

• halted stocks (beyond just the broad exchange’s level-1 halts)
• delayed exchange data and other technical challenges

At times over recent weeks, this impacted the intraday pricing and bid-ask spreads of some Canadian-listed ETFs. 

ETF investing in this market environment

As the world works through an unprecedented global response to the COVID-19 pandemic, markets may continue to experience high levels of volatility. During times of heightened volatility, ETF trading and execution considerations are particularly important. Below are critical trading tactics to implement for investors looking to buy and/or sell ETFs during periods of volatility. 

Use limit orders 

It is always advisable to use limit orders when buying or selling an ETF, and during times of volatility it is particularly important. The intraday pricing of an ETF is dependent on the intraday pricing of its underlying securities. During times of market volatility, disruptions of price clarity affecting an ETF’s underlying securities will affect its price, which could result in temporarily widened bid-ask spreads. If market-orders are entered during a period when there are wider spreads, trades may be executed with sub-optimal pricing. To avoid this, limit orders are recommended always, but specifically during times of heightened volatility.   

No trades until the market is ready 

It is typically not advised to enter trades immediately following market open (generally 15 minutes or after). This is because, once open, market makers must digest and incorporate all pricing information of the funds underlying securities, across multiple exchanges, sometimes in several countries. It can take between 10-15 minutes to incorporate and check all information, before displaying accurate pricing and normally-expected bid-ask spreads. During times of significant market volatility, it may take even longer to incorporate all the morning’s pricing information. 

During periods of multiday volatility like we have seen recently, it may take longer to incorporate price information, so it’s best to be patient and wait until pricing and bid-ask spreads come into their normally-expected ranges, before entering a limit-order to buy or sell. 

Consider only trading when underlying market is open

ETF intraday pricing and spreads are a representation of the intraday pricing and spreads of the fund’s underlying securities. As such, it is often recommended that you buy or sell ETFs when the markets of the fund’s underlying securities are open, this is the period of optimal price visibility. This is particularly important in times of market volatility because once a market is closed (e.g. European markets), market makers must adjust for the anticipated price movement in the closed market. During times of volatility, particularly when news is changing rapidly, it can become more difficult to determine price momentum and that can impact the pricing and bid-ask spreads of an ETF you may be buying or selling. 

Communication is key

Communicating with a retail or institutional trade desk or the capital market’s team at an ETF sponsor is always good practice – and it is particularly important during times of market volatility. As an example, the Manulife Investment Management ETF Capital Markets desk can:

1. Work in partnership with an advisor’s retail trade desk to ensure smooth trade execution
2. Provide perspective on normal or expected bid-ask spreads
3. Help advise on more complex execution, such as across a platform or model portfolio

As the ETF industry in Canada celebrates 30 years in existence, and with ETF assets at an all-time high², support and expertise will continue to be an important element of investor success. 

1 Source: Manulife Investment Management. Bloomberg as of March 16, 2020.

2 Source: Canadian ETF Association, ETF assets in Canada, $211.1B as of January 31, 2020.