Why ETFs are a must-have during volatile periods

by InvestEngine

Global financial markets have been particularly volatile in 2022. The fallout from Covid-19 was made worse by Russia’s ongoing invasion of Ukraine, a combination of factors that has seen most major indexes struggle to different extents this year. 

At InvestEngine, we’ve also seen our investor numbers grow from just over 4,000 at the start of the year to over 20,000 today. We also recently completed a study that found that over half of our investors had never previously invested in ETFs before signing up. 

This is reflective of our strong belief that ETF investing is the perfect antidote to market volatility and is more relevant than ever when things get choppy. 

Diversification as a default

Ultimately, ETF investing is all about diversification. Because investors can now easily and cheaply invest in a basket of (in some cases) thousands of individual stocks, they can spread their risk out across different industries, geographies and large cap companies. 

When it’s done right, diversification means that an investor’s wealth is never over reliant on the performance of any given asset. ETFs come in all different shapes and sizes – some mirror the S&P 500 while others group based on ESG criteria – so investors have the flexibility to build the portfolio they want but with diversification built in. 

Andrew Prosser, Head of Investments at InvestEngine, said: “Although there were some concerns around how index-tracking strategies, and ETF vehicles in particular, would hold up during a market downturn, the COVID-19 pandemic demonstrated that any fears around their operation during market stress were unfounded. Not only did ETFs continue to function as expected, their pace of growth increased during 2020 and 2021.” 

The risk level of different ETFs can differ significantly but, in the main, they’re being used as a way to sustainably protect and grow wealth over the long-term. For this reason, ETF investing is almost never about timing the market, rather it’s about spreading your wealth out to balance risk and return. 

As more and more investors become aware of ETF usage, particularly when building robust portfolios capable of withstanding periods of volatility, we expect uptake to 

Liquidity and transparency are also vital

Diversification is not the only consideration for investors during volatile periods. It’s also important, for example, that assets are clear about what they actually invest in. 

We asked Chris Mellor, Head of Equity & Commodity Product Management at Invesco about the benefits of ETF ownership outside of it being a diversification tool. 

“While most investors are probably first drawn to ETFs for their typical low costs, they have become increasingly popular in recent years for other reasons,” Chris says. “One of the most important considerations is whether you’ll be able to buy and sell your investments, and this is even more crucial in volatile market conditions. While there are no guarantees, ETFs did show at the start of the pandemic that they could continue trading even when the underlying markets were at their most volatile. 

“It may sound obvious, but it’s also important to know what you’re investing in. The transparency of an ETF means you can normally see all the holdings every day, so there shouldn’t be any nasty surprises.”

This is a sentiment echoed by Adrià Beso, Head of Platforms Distribution at WisdomTree. They said: “In volatile periods the beauty of exchange-traded products (ETPs) is that they provide investors greater flexibility, than other structures, to quickly and efficiently adapt their positioning. 

“The broad offering of asset classes and exposures not only gives investors a powerful tool to alter the shape of their core, satellite or cash holdings but also to take on tactical positions – allowing them to protect their portfolios by increasing weightings to historic safe haven assets like gold or other innovative diversifiers. All the while – investors have full transparency across their underlying ETF holdings.”

With the bear market expected to last into 2023, we think more people should be considering ETFs as part of their investment portfolios then they’re getting their finances in order towards the end of the tax year. Their relative stability and ability to diversify a portfolio make them a must-have during volatile periods.

You may also like

Leave a Comment