Beyond Bulls & Bears

LibertyShares

Viewing Volatility Versus Uncertainty Through an ETF Lens

Investors certainly have had to face both volatility and uncertainty these past few weeks given coronavirus concerns and other geopolitical risks. David Mann, our Head of Capital Markets, Global Exchange-Traded Funds (ETFs), talks about the difference between the two through the lens of ETF trading.

In times of increased market volatility, ETFs will tend to trade at their typical bid/ask spreads even if the broader markets are up/down multiple percentage points. The reason is that market makers quote our funds based on the value of the underlying securities, and even during big market moves, they will still have confidence in those values. As an example, during last week’s large market selloff, our equity-based funds that typically have spreads in the 2-4 cent range still had those spreads even with broader market down more than 3%. Investors should feel confident trading them, even during days with significant market moves.

On the other hand, market uncertainty, such as the unexpected 50 basis point1 interest-rate cut by the Federal Reserve recently, can and usually does cause a temporary widening of spreads. Whenever there is pending or unexpected news, ETF market makers will have doubts as to the value of the underlying securities and will thus widen out their ETF spreads accordingly.

This is true of all ETFs (not just ours). Investors should consider avoiding trading ETFs during times of market uncertainty. It is typically short-lived, and once the market makers have had time to digest the news and how it might impact the underlying security valuations, spreads typically fall back in line with the norms.

We continue to monitor our funds at all times and will gladly send updates as needed as to our opinions of the best times to trade.

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This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.

Any companies and case studies shown herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton Investments. The opinions are intended solely to provide insight into how securities are analyzed. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio. This is not a complete analysis of every material fact regarding any industry, security or investment and should not be viewed as an investment recommendation. This is intended to provide insight into the portfolio selection and research process. Factual statements are taken from sources considered reliable but have not been independently verified for completeness or accuracy. These opinions may not be relied upon as investment advice or as an offer for any particular security. Past performance is not an indicator or a guarantee of future results.

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What Are the Risks?

All investments involve risks, including possible loss of principal. Generally, those offering potential for higher returns are accompanied by a higher degree of risk.  Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. For actively managed ETFs, there is no guarantee that the manager’s investment decisions will produce the desired results.

ETFs trade like stocks, fluctuate in market value and may trade above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns. ETF shares may be bought or sold throughout the day at their market price on the exchange on which they are listed. However, there can be no guarantee that an active trading market for ETF shares will be developed or maintained or that their listing will continue or remain unchanged. While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.

For more information on any of our funds, contact your financial advisor or download a free prospectus. Investors should carefully consider a fund’s investment goals, risks, sales charges and expenses before investing. The prospectus contains this and other information. Please read the prospectus carefully before investing or sending money.

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1. A basis point is a unit of measurement. One basis point is equal to 0.01%.