ASX exchange-traded funds provider Vanguard says April's US tariff-driven market volatility was the perfect proving ground for ETFs.
Vanguard research shows ETFs withstood the market dive better than the underlying shares within those exchange-traded funds.
In an article, Vanguard ETF Capital Markets director David Sharp and senior specialist Patrick Hooper discuss why this happened.
Sharp and Hooper wrote:
In early April, tariffs roiled financial markets, presenting an opportunity to study whether ETFs performed better than the same securities traded outside the ETF vehicle.
During times of heightened volatility, ETF bid-ask spreads tend to widen because of price uncertainty. This can increase transaction costs for investors who choose to trade during these periods.
Despite the volatility, Vanguard ETFs demonstrated remarkable resilience.
Sharp and Hooper explained that although bid-ask spreads widened in April, they remained significantly lower for exchange-traded funds than the underlying shares.
Bid-ask spreads for ETFs' underlying securities are typically larger than ETF spreads.
Even at the height of the tumult in early April, this relationship held true, underscoring the cost efficiency of the ETF structure.
At peak volatility, Vanguard ETF spreads rose only by an average of about 4 basis points (bps)—from 2 bps to 6 bps—while spreads for the baskets they represent rose an average of 12 bps—from 16 bps to 28 bps.
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What to do with your ASX ETFs when the market is volatile
The most popular exchange-traded fund with ASX investors is the Vanguard Australian Shares Index ETF (ASX: VAS).
The VAS ETF tracks the S&P/ASX 300 Index (ASX: XKO) before fees.
The ASX VAS is trading at $106.29 apiece, up 0.97% today.
During the US tariff sell-off between 2 and 11 April, the VAS exchange-traded fund fell by 3.55%.
The ASX 300 fell by 3.62%.
Hooper says that in times of market volatility, "sometimes the smartest trade is no trade at all".
But if an investor wants to trade, Hooper has some tips on how to do it.
Hooper commented:
Fortunately, understanding best practices for trading ETFs can help investors reduce transaction costs and improve their outcomes even when markets swing dramatically.
These best practices include using market limit orders.
Market limit orders are placed slightly above the ask or offer price when buying and slightly below the best bid when selling.
Hooper says: "They enable greater price control than market orders, while still providing trading flexibility."
He also recommends being wary of trading ASX ETFs at the market open and close.
Here's why:
ETF prices can fluctuate more during these periods; allowing some time to pass before trading in the morning and completing large trades well before closing can give investors more control over pricing.
Hooper also recommends trying to trade ASX international ETFs during the local market hours for their underlying stocks.
He says this can lead to better results.
Popular ASX international ETFs include the iShares S&P 500 AUD ETF (ASX: IVV), which tracks the S&P 500 Index (SP: .INX) before fees.
The ASX IVV is trading at $62.27 apiece, up 0.52% today.
During the US tariff sell-off, the IVV ETF lost 3.57% while the S&P 500 fell 5.42% (bear in mind the difference in trading hours, though).
