Until recently, advisors rarely heard about problems involved in trading Exchange Traded Funds in volatile markets. Then came the chaos of the stock market’s open on August 24.
During the first hour of trading that day, prices of some popular ETFs fell by more than 30 percent–five times the 6 percent decline in the S&P 500 Index. Trading-halt circuit-breakers were implemented on ETFs more than 600 times, leaving many sell orders temporarily unfillable. In fact, half of the 1,200 total circuit-breakers triggered in all securities that day were in ETFs.
One advisor with $28 million AUM in Lansing, MI, had placed stop-loss orders for all of his client’s ETFs at 15 percent below their peak prices.
Helplessly, he was stopped out of almost every one in a few eye blinks.
Was this a one-off event or will it happen again? What lessons can advisors learn from it to protect clients in the future?
According to Joe Saluzzi, an ETF trading guru: “Something went wrong here. Somewhere along the way, the ETF pricing model was broken today.”