This article was originally published on ETFTrends.com.
ETF Trends publisher Tom Lydon appeared on CNBC’s ‘Closing Bell’ on Monday afternoon to discuss if ETFs are affecting the recent market volatility and how are they holding up.
Lydon told host Megan Kelly that ETFs experienced a record $376 billion in flows in 2018, adding that momentum continued with another $78 billion of flows in January.
“There may have been about $25 billion that came out in the last week,” Lydon said. “That’s kind of a blip on the radar; not really that much.”
Despite the volatility in the markets, Lydon said ETFs continued to trade exactly how they were supposed to.
“There were no halts on exchanges, there was real tight trading and even all the inverse/leveraged ETFs, where people tried to throw stones at them, again, they did exactly what they were supposed to do," he said. "The fundamentals are there.”
When Kelly quizzed Lydon whether inverse and leveraged ETFs should be banned or have better disclosures, Lydon responded that the majority are either equity-based or fixed-income based.
“They did what they were supposed to do,” he said. “The chink in the armor is when we are talking about the few volatility ETFs. That was a moment in time where the last hour of trading where a billion dollars came into the futures market and had to be settled between 4 pm and 4:15 pm (Eastern), where it exasperated a problem. That’s where we really need to focus, just on these volatility ETFs where you lost about 95% if in fact you bet volatility was going to come back to earth and decline, and you were right, unfortunately the tool didn’t do what you wanted it to do.”
The VIX, or so-called fear index, is a widely observed indicator for investor sentiment in the stock market and measures the expected or implied volatility of large-cap stock options traded on the S&P 500 index. ETPs that track VIX futures allow investors to profit during rising volatility or hedge against short-term turns.
Amid last Monday’s plunge in U.S. stocks, the VIX surged, and inverse volatility exchange traded notes and ETFs attracted $1 billion in the closing hours of trading. Buying VIX futures after the close of the market exacerbated pricing which had the reverse affect than investors intended.
In after-hours trading last Monday, XIV suffered catastrophic losses. The ETN’s market closing Monday was $99, but its closing indicative price as listed on the VelocityShares website was just $4.22.
Intraday drops of 80% or more trigger termination events with XIV.
For more ETF-related commentary from Tom Lydon and other industry experts, visit our video category.