What Made ETFs A Star Investment Opportunity During COVID-19 Crisis?

Friday, 28 August 2020, 5:59 pm
Press Release: Kalkine

Summary

• Exchange Traded Funds (ETFs) remarkably proved their resilience during the Global Virus Crisis.
• As per Smartshares, the total value of ETF trades on the NZ market jumped to NZD 1.234 billion in 1H 2020, relative to less than NZD 1 billion throughout the year 2019.
• Investors have been flocking to precious metal ETFs on the back of soaring prices of underlying metals.
• The easy access to lucrative markets and thematic investing opportunity appear to have favoured the ETF space.
• The cost-efficiency and liquidity benefits associated with the ETFs further supported them in passing the coronavirus stress test.

While market volatility caused by COVID-19 offered Exchange Traded Funds (ETFs) with the most critical test since the 2008 Global Financial Crisis, they remarkably proved their resilience during the virus crisis. The pandemic-induced uncertainty and resultant economic damage drove investors’ exposure to ETFs in a ‘FOMO’ investment environment.

NZ’s only ETF issuer, Smartshares notified that the total value of ETF trades on NZ market jumped to NZD 1.234 billion in 1H 2020, relative to less than NZD 1 billion throughout the year 2019. Smartshares also informed that the total value of ETF trades soared by about 243 per cent in 1H 2020 on 2019.

Smartshares observes enormous growth potential for ETFs in the NZ market, with funds still being at the infancy level.

Staying in strong demand, ETFs demonstrated robust resilience and strength during the crisis despite unprecedented market volatility. Investors appear to be turning towards ETFs in a bid to not lose out attractive opportunities, diversify from regular equities and rebalance portfolios & hedge positions.

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With that said, let us discuss some key reasons that made ETFs a ‘star investment opportunity’ during the coronavirus crisis:

1. Exposure to Precious Metals Rally

The year 2020 has been ruling in favour of precious metals, with massive rally seen across gold and silver prices. Investors have been flocking to gold and other metals ETFs, deemed to be relatively safe investments amidst a spike in virus-induced market volatility.

A recent data announced by the World Gold Council revealed that gold-backed ETFs saw record inflows of USD 39.5 billion in the first half of 2020, relative to USD 23 billion in 2016.

The yellow metal ETFs witnessed buoyant demand in 1H 2020, with gold price rallying to record highs amid COVID-19 fears, growing US-China tension, tumbling dollar and distressed asset returns.

Besides gold-backed ETFs, a significant surge in investors’ interest was noted for silver ETFs during the crisis, backed by an unprecedented rise in silver price since March 2020 crash. Notably, silver has outperformed gold in recouping from March lows amidst pickup in industrial activities and growth in the global solar photovoltaic industry.

Given these promising trends, one may cautiously park chunk of funds in gold and silver-backed ETFs to build a robust virus-proof portfolio. However, factors like resource endowment, mining success, and potential project acquisition/expansion of the miner deserve closer attention before placing any trades on mining stocks/ETFs.

2. Access to Lucrative Markets and Thematic Investing Opportunity

Another factor that drew investors’ attention to the ETF space during Global Virus Crisis was the easy access to lucrative markets and thematic investing trends. ETFs enabled investors to make robust investment decisions based on buoyant sector or market performance, eliminating the need to perform company-specific due diligence.

Besides, a multitude of sectors joined the thematic investing trend in 2020, raising the popularity of thematic ETFs during the market turmoil. These themes comprise AI, robotics & cybersecurity, healthcare, cloud computing, digital entertainment, gaming and other disruptive innovation and technology themes.

To provide investors with exposure to various markets and support them create a well-diversified portfolio, ETF issuer Smartshares introduced four new ETFs as part of its Core Series in July.

Smartshares currently offers ~ 35 ETFs to investors that invest across Australia, Kiwi Land, the US and other global markets. Besides, investors get the opportunity to choose from two popular thematic trends, including technology and healthcare, via Smartshares’ thematic ETFs.

While thematic ETFs have been designed to excel traditional business cycles, one needs to be ultra-cautious in picking up the right theme with robust growth prospects.

3. Diversification

While there is nothing sort of a perfect investment in the financial market, ETFs appear to stand apart as an investment category, with some real benefits for individual investors. One of these promising advantages is instant diversification across a range of investments.

Buying an ETF provides the investor with an ownership in a basket of stocks relative to a single company, limiting the risk exposure to a specific asset. In other words, ETFs usually guard investors against the volatility in the equity market when certain eggs within the ETF nest fall.

The COVID-19-induced market volatility acted up as a wake-up call for investors to make broader diversification in their portfolios, incorporating ETFs.

Though ETFs hold the potential to offer exposure to a wide range of asset classes, one need not indulge in over-diversification and duplication. Instead, determining the right allocation as per your risk appetite seems crucial to thriving in the market crisis.

4. Cost Efficiency and Liquidity

The cost-efficiency and liquidity benefits associated with the ETFs further supported them in passing the coronavirus stress test.

As liquidity in underlying markets deteriorated during the market selloff in March, ETFs continued to trade efficiently, providing a source of liquidity to the investors. These funds helped investors move large blocks of assets in a single trade, enabling them to alter their portfolios intra-day and in real-time.

Besides, ETFs’ ability to precisely price the underlying basket of securities ensured accurate payment on the part of incoming/outgoing investors for making trades even during high volatility. This helped in keeping ETF investment cost-efficient, transparent and independent relative to individual stocks.

While these perks hold true for ETFs, but undeniably there is no free lunch! ETFs, which are actively managed, incur high management fees and some industries limit diversification. The only mantra is to keep costs low and hunt for ETFs that best fit your investing strategy.

It is all about weighing risks and benefits and amid current virus-induced crisis!

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