Exchange-traded funds are a part of the global market that’s getting bigger and bigger, but lately they’ve also been getting quieter and quieter.
Trading volumes for ETFs have slowed dramatically in recent weeks, the byproduct of both a seasonal lull and an unusually quiet underlying stock market, one where a lack of big swings have given traders few opportunities to ride momentum or make short-term bets. The CBOE Volatility index
has recently been trading near its lowest levels ever.
While major indexes have been hitting repeat records of late, their daily moves have been slight, with the average absolute daily price change at its lowest since 1965. While individual stocks have seen heavy trading on certain sessions, particularly amid the second-quarter earnings season, the most widely used ETFs track major indexes like the S&P 500
or the Russell 2000
Analysts said a slowdown in volume wasn’t necessarily a bearish sign for markets, though it was something to monitor.
“There’s a seasonality effect to low volume, coming on top of low market volatility. The question is whether this is a sign of complacency, and whether that portends weakness,” said Matthew Person, head of global equity at Northern Trust. “Marginal trading can push things around a bit more than you would see otherwise, so this is something to be cognizant of.”
ETF trading averaged $60 billion a day in July and comprised 24% of all U.S. exchange trading, according to data from Credit Suisse. That represents a 12% drop from July 2016, as well as a 20% decline from June.
The 24% figure represents the lowest monthly figure since 2014, the investment bank wrote, “reflecting the lower levels of correlation in the markets.”
Correlation—or the degree to which two different securities move in tandem—has declined lately, which some analysts say has made a better environment for stock picking, as opposed to simply buying the broader market. Ever since the market bottomed in 2009 in the wake of the financial crisis, correlations have been elevated, making it additionally difficult for active managers—who individually select the holdings of their portfolios, rather than mimicking an underlying index—to outperform. That, along with the typically lower fees of passive products, fueled the ongoing shift into broad-market vehicles like ETFs.
The SPDR S&P 500 ETF Trust
embodies the low-volume trend. The fund is the largest ETF on the market by far, and not only is it the most heavily traded ETF on the market on a regular basis, it is frequently the most traded security of any type.
Over the entire month of July, however, a mere 1.06 billion SPY shares exchanged hands, the lowest monthly total for the fund since February 2005. (In June 2017, more than 1.57 billion SPY shares were traded.) On July 17, a mere 33.5 million shares were traded, its quietest day since December 2006, according to FactSet data.
On Thursday, about 40.37 million shares exchanged hands, less than 70% of the fund’s 30-day average volume, which is above 57.8 million shares. That occurred on a day when the fund dipped 0.2%, though it is within one percentage point from record levels.
The SPY has also seen sharp outflows thus far this year, with about $7.3 billion being pulled from the $241 billion fund, the most of any ETF on the market, according to FactSet. Analysts attributed the move to SPY’s high expense ratio relative to other S&P 500-tracking funds and other factors.
The lower-volume trading comes at a time when net flow into ETFs remains positive. U.S. listed exchange-traded products—which include both ETFs and the smaller category of exchange-traded notes—had inflows of $32 billion in July, per Credit Suisse.
Even funds with positive flows have seen lower volume. The iShares Core S&P 500 ETF
, the second-largest fund on the market, had 62.5 million shares exchange hands over the month of July, its lowest monthly total since February of this year. More than $21.3 billion has flowed into the fund this year.