The regional banking sector in the US nearly came to its knees this month. Silicon Valley and Signature Bank closed and were backstopped by the government. Others fell as much as 20%-80% at one point during the trading day on 13 March.
Bank failures have existed for decades. Whether it is improper risk management, lack of regulatory oversight or just bad loan management, we’ve seen this movie many times before.
Here is another movie we have seen before; the one where the ETF comes in to save the day. On 13 March, despite the carnage in the regional bank space, the SPDR S&P Regional Banking ETF (KRE) was the go-to vehicle for price discovery and to access liquidity.
It is fascinating that several stocks in KRE were halted for trading but the ETF kept on trading with increased volumes. I was telling investors that if ETF liquidity declined on days like 13 March then the naysayers have a point. But the fact liquidity spikes up means that the product is working.
KRE traded $4.9bn notional on 10 March and $4.2bn on 13 March. Its normal average volume is around $887m.
Effectively, it traded five times its normal volume when the regional banking sector was collapsing. The product was the price discovery tool and source of liquidity. That is amazing.
There is a reason the ETF industry has $9.6trn assets globally and it is not just because of low-cost indexation.
We have seen the ETF wrapper's success as a go-to vehicle and price discovery tool countless times in the past. The VanEck Egypt ETF continued trading when the Arab Spring caused the Egyptian stock market to close, and the same thing happened when Greece closed its stock market back in 2015 during its tumultuous financial breakdown.
And many times when the fixed income market was either closed or there was an interest rate/credit shock (think of the “taper tantrum”), fixed income ETF liquidity was plentiful and the price discovery vehicle of choice.
ETF naysayers, which range from world-famous economists to owners of very large fixed income asset managers, that deny the viability of ETFs in times of crisis should consider finding something else to pontificate on.
John Davi is founder of Astoria Portfolio Advisors
This article was originally published on ETF.com