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ETF stats in action: December 2018 case study

December 2018 was an unusually wild month for investors. Concerns about trade wars, global economic growth, and higher interest rates all contributed to the gyrations.

Five key statistics from December 2018 can help investors understand how exchange traded funds (ETFs) contribute to modern markets.

S&P 500 Index total return

S&P 500 Index total return

Source: Bloomberg as of January 2019
Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

1. ETF flows

The numbers: Investor demand spurred the creation of $53.7 billion in new ETF shares in December, the most since Jan. 2018.1 Money moved into U.S.-equity, non-U.S. equity, bond, and commodities ETFs.

The takeaway: December’s flows demonstrate that ETF investors were buyers amid the volatility.

Monthly net ETF flows

Monthly net ETF flows

Source: BlackRock as of January 2019; U.S.-listed ETFs excludes exchange traded notes (ETNs) and leveraged and inversed exchange traded products (ETPs).

2. Estimated impact of ETF flows on market prices

The numbers: BlackRock estimates that ETF inflows and outflows resulted in 5.8% of U.S. equity trading in December 2018, slightly above the 4.7% average but less than 6.7% that occurred in December 2017.2

The takeaway: ETF trading in December exerted modest influence on stocks, even in volatile markets.

Estimated impact of flows on U.S. stock prices (Monthly imputed flows)

Estimated impact of flows on U.S. stock prices (Monthly imputed flows)

Source: BlackRock as of January 2019
There can be no assurances that an active trading market for shares of an ETF will develop or be maintained.

3. ETF trading volume

The numbers: ETFs accounted for 37% of total U.S. equity market trading (including single stocks, ETFs, and other exchange traded products) by value in December, the highest monthly reading since 2009.3

The takeaway: Investors targeted ETFs to help rebalance allocations and offset risk. To put December’s ETF trading volume in perspective, $37 of every $100 that changed hands across all U.S. stock venues in December took place with ETFs.

Monthy ETF trading volume as a percentage of total U.S. stock market volume

Monthy ETF trading volume as a percentage of total U.S. stock market volume

Source: BlackRock as of January 2019

4. Bid/ask spreads

The numbers: The average bid/ask “spread” of every stock in the Russell 2000 Index was 12.5 basis points (a hundredth of a percentage point) in December.4 At the same time, the bid/ask spread in the iShares Russell 2000 ETF (IWM), which seeks to track the Russell 2000 Index, was 0.86 basis points.

The takeaway: ETF prices, like stock prices, are established by “bid” and “ask” quotations. The difference between the two, the “bid/ask spread,” measures how much it costs to get in and out of each ETF share (wide spreads mean higher costs, narrow spreads mean lower costs). In some cases, the ETF bid/ask spread was more favorable than a comparable basket of constituent stocks during December’s volatility.

Monthly bid/ask spreads in the iShares Russell 2000 ETF (IWM) and Russell 2000 Index stocks

Monthly bid/ask spreads in the iShares Russell 2000 ETF (IWM) and Russell 2000 Index stocks

Source: BlackRock as of February 18, 2019

5. Bond ETF trading versus individual bond trading

The numbers: Volume in all U.S.-listed high yield bond ETFs surged to a record $72 billion in December, while volume in individual high yield bonds was $154 billion, the lowest since June 2014.5 Taken together, December’s average daily trading in all U.S. high yield bond ETFs reached 47% of individual high yield bonds traded in the over-the-counter (OTC) market – a record.

The takeaway: Trading in U.S. high yield corporate bond ETFs surged to a record in December at the same time that trading in individual high yield bonds dwindled. These related trends, which took place as the corporate bond markets were under stress, underscore that investors are increasingly turning to on-exchange ETF trading.

High yield corporate bond ETFs volume increased, and individual high yield bond volume decreased, as credit conditions deteriorated

High yield corporate bond ETFs volume increased, and individual high yield bond volume decreased, as a credit conditions deteriorated

Sources: SIFMA TRACE; BlackRock as of January 3, 2019; Federal Reserve Bank of St. Louis