When markets turn volatile, some question the role of exchange-traded funds (ETFs) in exacerbating market moves. David Mann, our Head of Capital Markets, Global ETFs, offers some perspective.

Apologies in advance for sprinkling in a little quantum physics1 during these crazy times, but if it can create a slight grin or even a slow shake of the head, it is probably worth it.

Almost any discussion on ETF trading is actually a discussion on relativity. When we talk about an ETF’s liquidity, we are really just measuring the impact of a trade in relation to its current market bid/ask spread. For ETFs, that bid/ask spread also has a relation to the value of all those underlying securities it holds.

For ETFs, that market you see also has a relation to the value of all those underlying securities.

ETF arbitrage is the term we use to talk about the relationship between the ETF price and the price of its underlying basket of securities. Typically when one price is higher/lower than the other, ETF liquidity providers will sell/buy the other, which helps keep the two in line.

During severe market moves, some observers question whether ETFs serve as mitigators or exacerbators of volatility. And back to quantum physics, it is impossible to observe the price action of underlying stocks independent of the price action of ETFs because of their relativity.

I have some more thoughts on this but will save them for a later day.