ETF investors were taken on a rollercoaster ride in the March 2020 quarter as markets reacted to the worsening coronavirus outbreak.

After carrying the 2019 momentum into 2020, supported by easing global recessionary pressure, a long-awaited Brexit resolution, and fading fears of US-China trade-war tensions, the pandemic caused a paradigm shift of economic uncertainties, sending the S&P/ASX 200 down over 20 per cent.

The Australian ETF market shrunk 13.5 per cent to $56 billion, hampered by extreme volatility and depressed investor sentiment. Inflows continued, however, with the exchange's 219 products receiving $4.9 billion against total outflows of $1.6 billion.

In the latest ETFInvestor, Morningstar senior analysts Kongkon Gogoi and Zunjar Sanzgiri examine three key themes that played out in the ETF market over the March quarter.

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1. Wider buy/sell spreads in fixed-interest ETFs

The spread of the coronavirus pandemic rattled the fixed-income market during the first quarter of 2020, causing dislocations and a liquidity shock not seen since the 2008 global financial crisis.

Gogoi and Sanzgiri say this was brought on by several factors, including the sell-off in the equities market and changing investor sentiment.

"The broad sell-off in equities had a ripple effect in the fixed-income market, with investors exiting shorter-dated credit to raise cash to buy equities to rebalance their portfolios," they say.

"The general risk-off sentiment in the market further intensified this trend as investors took actions to reduce risk in their portfolios amid weakening expectation of a rapid recovery of growth from the pandemic.

"As a result, the bond market was inundated with sellers, especially of high yielding credit, creating a demand/supply imbalance that led to drying up of liquidity and widening of credit spreads.

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"This, combined with elevated volatility levels during March and early April, made trading challenging which, in turn, caused major fixed-interest ETFs to trade at discounts toward mid- to late March."

The VIX index (S&P/ASX 200 VIX), which is a measure of the stock market's expectation of volatility, breach 53.1 in March 2020, showing volatility levels akin to the global financial crisis.

Gogoi and Sanzgiri say uncertainties in determining the fair value of the underlying bonds made trading expensive and led to varied responses to the situation, with most ETF providers increasing buy/sell spreads.

Fixed-interest strategies with the widest spreads in March 2020


Source: Morningstar Direct

2. Rotation to equities and safe-haven assets

Investors took advantage of the equity price free-fall in March to boost their allocation to Australian equities. A dash to safety also attracted inflows to products with exposure to physical gold.

Vanguard Australian Shares ETF (VAS) saw the highest net inflows over the quarter of $713 million, outstripping the next highest ETFS Physical Gold ETC (GOLD) at $280 million. Australian shares ETFs SPFR S&P/ASX 200 ETF (STW) and the iShares Core S&P/ASX 200 ETF (IOZ) also appeared in the top five products by inflows. 

Concurrently, fixed income and money market ETFs experienced heavy outflows. Investors pulled millions out of the iShares Core Cash ETF (BILL) and the BetaShares Aus High Interest Cash ETF (AAA).

Top 5 and bottom 5 strategies, March 2020 net flows ($m)


Source: Morningstar Direct

3. Trading volumes spike

The March quarter brought an unprecedented spike in ETP trading volumes. Volumes started to snowball around mid-March, prompting a stern warning from the regulator.

Trading volumes between April 2019 and March 2020


Source: Morningstar Direct

Gogoi and Sanzgiri say the alternative strategies category was the main contributor to the spike.

"The category witnessed 6.5 times the turnover compared with the average over the trailing one-year period," they say.

"The bulk of this increase can be attributed to the three BetaShares bear-hedged products--presumably investors want to take advantage of falling Australian and US markets."

Trading frequency soared as did the number of different securities traded per day; conversely, the duration for holding the securities has plunged.

ASIC says this indicates an increase in short-term and "day-trading” activity. However, only a few investors pursuing quick windfalls were successful.

"Retail investors chasing quick profits by playing the market over the short-term have traditionally performed poorly—in good times and bad—even in relatively stable, less volatile market conditions," the regulator says.

BetaShares Australian Equities Strong Bear Hedge Fund (BBOZ) was the most-traded ETF in March by transaction value.

Trading also spiked in Australian Equities, which experienced 3.6 times the turnover in March 2020 compared with their average over the trailing one-year period.