As the Securities and Exchange Commission considers whether exchange traded funds are to blame for causing the recent spate of market volatility, Charles Schwab's ETF team stepped forward Friday to defend them.
Asked during a conference call with journalists if ETFs cause volatility, Steve Cucchiaro, CIO of Schwab subsidiary Windhaven Investment Management, said market turbulence is caused more by day-to-day news events that keep sending mixed messages to investors. He pointed to three issues in particular: the fear of European debt contagion, political gridlock in the United States and inflation in China.
"If a news item corroborates that the economy is entering recession, we have a bad market day, and if we get an encouraging piece of data, then the market has a good day," Cucchiaro said. "Market volatility is causing volatility in ETFs and not conversely. We think ETFs provide investors with hedges against risky scenarios."
Because of the growth and complexity of ETFs, the SEC is reviewing the adequacy of investor disclosure about the products, their liquidity and whether they contribute to market volatility, said Eileen Rominger, director of the SEC's Division of Investment Management, before a Senate panel on Wednesday.
Separately, in an analyst note published on Oct. 17, Schwab Chief Investment Strategist Liz Ann Sonders said high-frequency trading (HFT) and the use of leveraged ETFs are the primary culprits in market volatility—"but the impact isn't all bad."
"Leveraged ETFs give investors the opportunity to bet on a basket of stocks, commodities or an overall index and have become very popular vehicles for traders generally and HFT firms in particular," Sonders wrote. "It's estimated there's about $1 trillion invested in leveraged ETFs. Their attractiveness to HFT users comes from the fact that investors can bet long or short and leverage the bet, while also moving in and out during the trading day to lock in gains (or limit losses, which can be substantial)."
Overall, retail investors in particular like ETFs so much that they were the only Schwab clients to drive flows in the third quarter, with a 17% increase in assets, said Beth Flynn, vice president and head of third-party ETF platform management, on the call.
