The Truth About ETFs And Volatility

by: Vanguard

In my role at Vanguard, I'm often asked to speak to groups of clients. Invariably, they'll ask about my outlook for some segment of the market. I often joke that my crystal ball has been cloudy of late.

You see, at Vanguard, we're not into making short-term market predictions. We believe that if you stick to the tried-and- true principles of maintaining a low-cost, balanced, diversified portfolio that's aligned with your long-term goals, you'll give yourself the best chance for investment success.

The philosophy may not grab headlines that often feature provocative, bold market speculations, but it's a sound approach.

One thing that my crystal ball is clear on, however, is the notion that when market volatility ultimately returns, ETFs will be blamed. How can I be sure? It's happened too many times to count.

Historically low volatility

I'm a numbers guy. When I hear a piece of information, I want to see the proof to back it up.

So, what does the data say? Are ETFs a source of volatility? I wrote about this subject back in 20131, and my colleague Joel Dickson briefly touched on it in his most recent blog post. I think it's worth revisiting the topic to reinforce my point.

At the time I'm writing this, we've gone 50 consecutive trading days (December 7, 2016, through February 21, 2017) in which the S&P 500 has fluctuated less than 1%. Before that we saw a period of 43 consecutive trading days in 2016.

As you can see by the chart below, this is historically low volatility!

Volatility this low is rare

Source: Vanguard

What volatility?

Over the past decade, ETFs have become enormously popular among advisors for their use in building investment portfolios. Although sometimes portrayed as unique instruments, ETFs are similar to mutual funds from both a regulatory and a structural standpoint2.

All of our research shows that when volatility does spike the primary culprit is global macro events.

The next time I hear someone attribute market volatility to ETFs, I have my response ready.

"Sounds like 'alternative facts' to me!"

Footnotes

  1. Fran Kinniry, 2013. Vanguard: Where's the volatility? Accessed February 21, 2017, at https://www.etftrends.com/2013/02/vanguard-wheres-the-volatility/
  2. There may be other material differences between products that must be considered prior to investing.

Notes:

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All investing is subject to risk, including the possible loss of the money you invest. Past performance is no guarantee of future returns.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Fran Kinniry

Francis M. Kinniry is a principal in Vanguard Investment Strategy Group, whose primary responsibilities are capital market research, portfolio design, development and implementation of customized investment solutions, investment market commentary, and research. The group's proprietary research on investment, economic, and portfolio management issues has been published in leading academic and practitioner journals. It also is responsible for establishing Vanguard's investment philosophy, methodology, and portfolio construction strategies. Mr. Kinniry has worked extensively with ultra high net worth families and institutional investors, creating customized portfolio solutions for their investment needs. He also initiated the Vanguard Investment Counseling & Research department and Vanguard Asset Management and Advisory Services. Before joining the company in 1997, he was a partner and senior portfolio manager for Executive Investment Advisors, Inc., an institutional asset management firm. Previously, he was a portfolio manager for H. Katz Capital, a venture capital and hedge fund manager. Mr. Kinniry has more than 20 years of experience in the industry and is a regular speaker on investment, economic, and portfolio management issues. He is a Chartered Financial Analyst® charterholder and earned his M.B.A. and bachelor's degrees from Drexel University.

Visit vanguard.com or contact your broker to obtain a Vanguard ETF or fund prospectus which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss in a declining market.

Foreign investing involves additional risks including currency fluctuations and political uncertainty.

Stocks of companies in emerging markets are generally more risky than stocks of companies in developed countries.

All investing is subject to risk, including possible loss of principal.

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