ETF Ecosystem Shows Strength in Unstable 2022
We often hear that “the ETF marketplace is unstable in times of extreme market stress.” While there have been occasions in the past when this has been true, such as the “flash crash” of August 24, 2015, and the Covid decline of March 2020, these have been rare occurrences and were quickly addressed. Additionally, with the learnings of the past, the ETF ecosystem is better prepared than ever to either prevent these issues from occurring or rapidly resolve them if they arise again.
For example, one can look at the market volatility and instability in 2022. We witnessed a war in Ukraine, sharp interest rate increases, the worst inflation in 40 years, and the VIX (CBOE Volatility Index)1 reach a high of 36, which is about twice the average volatility from 2021. Despite all of this, the ETF marketplace has functioned quite well, with stability and liquidity.
Consider these factors behind the strength of the ETF ecosystem:
1 CBOE Volatility Index, commonly referred to as the VIX, is a real-time market index representing the market's expectations for volatility over the coming 30 days.
Liquidity refers to the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price.
Before investing, consider the fund's investment objectives, risks, charges, and expenses. Visit im.natixis.com for a prospectus or a summary prospectus containing this and other information. Read it carefully.
An exchange-traded fund, or ETF, is a marketable security that tracks an index, commodity, bond, or a basket of assets like an index fund. ETFs trade like common stock on a stock exchange and experience price fluctuations throughout the day as they are bought and sold. Short-term fixed income ETFs invest in fixed income securities with durations between one and five years.
All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income, money market, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.
The views and opinions expressed may change based on market and other conditions. This material is provided for informational purposes only and should not be construed as investment advice. There can be no assurance that developments will transpire as forecasted. Actual results may vary.
Unlike passive investments, there are no indexes that an active investment attempts to track or replicate. Thus, the ability of an active investment to achieve its objectives will depend on the effectiveness of the investment manager.
Diversification does not guarantee a profit or protect against a loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Asset allocation does not ensure a profit or protect against loss.
There are significant differences between mutual funds, SMAs and ETFs; including, but not limited to, how shares are acquired, costs, and tax efficiency. For ETFs and mutual funds, investors own shares of the fund – for SMAs investors directly own the SMA's underlying securities. ETFs and mutual funds are considered pooled investment vehicles in which all investors have the same underlying security exposure in a given product. SMAs grant investors ownership of the underlying securities themselves, which can enable further exposure customization. ETF shares trade on an exchange in the secondary market and price throughout the day; mutual fund shares are not listed on exchanges and only price at the end of the trading day. SMAs hold underlying security shares that mostly trade on exchanges and can be purchased or sold throughout the trading day. An ETF’s investment minimum is merely the market share price, mutual funds can have different share classes where investment minimums can vary, and SMAs typically have investment minimums that are higher than both mutual funds and ETFs. From a tax efficiency perspective, SMAs give investors the ability to manage individual securities directly for tax-loss harvesting. ETFs have the ability to take advantage of the in-kind share redemption process and secondary market trading to assist in tax efficiency. Mutual funds have limited ability to enhance tax efficiency due to their share redemption mechanism, though some funds are managed with tax efficiency in mind. Fees can differ across all three vehicles based on the total amount invested, differing acquisition costs, management fees and other factors. Please work with your advisor and consider these differences before investing.
ETF General Risk: ETFs trade like stocks, are subject to investment risk, and will fluctuate in market value. Unlike mutual funds, ETF shares are not individually redeemable directly with the Fund and are bought and sold on the secondary market at market price, which may be higher or lower than the ETF's net asset value (NAV). Transactions in shares of ETFs will result in brokerage commissions, which will reduce returns. Active ETF: Unlike typical exchange-traded funds, there are no indexes that the Fund attempts to track or replicate. Thus, the ability of the Fund to achieve its objectives will depend on the effectiveness of the portfolio manager. There is no assurance that the investment process will consistently lead to successful investing. Fixed Income Securities Risk: Fixed income securities may carry one or more of the following risks: credit, interest rate (as interest rates rise bond prices usually fall), inflation, and liquidity.
Interest Rate Risk: Interest rate risk is a major risk to all bondholders. As rates rise, existing bonds that offer a lower rate of return decline in value because newly issued bonds that pay higher rates are more attractive to investors.
Natixis Distribution, LLC (fund distributor, member FINRA | SIPC) and Loomis, Sayles & Company, L.P. are affiliated.
ALPS Distributors, Inc. is the distributor for the Natixis Loomis Sayles Short Duration Income ETF, the Natixis Vaughan Nelson Mid Cap ETF, the Natixis Vaughan Nelson Select ETF, and the Natixis Loomis Sayles Focused Growth ETF. Natixis Distribution, LLC is a marketing agent. ALPS Distributors, Inc. is not affiliated with Natixis Distribution, LLC.
For example, one can look at the market volatility and instability in 2022. We witnessed a war in Ukraine, sharp interest rate increases, the worst inflation in 40 years, and the VIX (CBOE Volatility Index)1 reach a high of 36, which is about twice the average volatility from 2021. Despite all of this, the ETF marketplace has functioned quite well, with stability and liquidity.
Consider these factors behind the strength of the ETF ecosystem:
- ETFs are a mature vehicle type dating back to 1993. With nearly 30 years of experience in the marketplace, ETF industry participants have been able to apply historical learnings to enhance operational and trading processes. In addition, with over 2,500 ETFs in the US covering both active and passive management in a range of equity, fixed income and alternative asset classes, the ETF marketplace has been able to stress-test various scenarios.
- Liquidity continues to improve. The liquidity of ETFs is driven by the liquidity of their underlying investments. As stewards to investors, the ETF community has been vigilant about creating products that have a reasonable liquidity profile, even in stressed markets. There is no benefit to an ETF issuer to launch a higher-risk product that could eventually have limited liquidity. That’s because if this illiquidity occurs, it is bad for its investors and bad for the issuer’s brand in the marketplace.
- Regulators carefully analyze the ETF market’s functioning, test product concepts, and set guidelines to protect investors from harm. A simple example of this is the 15% maximum on illiquid securities. The SEC is vigilant about ensuring the ETF industry is set up to help investors succeed. While there were ETF liquidity challenges in March 2020, based on the lack of liquidity in the underlying investments, all vehicle types (not just ETFs) were affected. As a backstop to extreme events like this, the US government stepped in and created confidence and greater liquidity in the system. This governmental backing is an important last-resort support system for the industry.
- Investors need to carefully think before they “panic act.” Looking back at the few days of strained liquidity in the history of the ETF market, those who likely were most harmed were those who panic sold or those who did not utilize best practices when trading. For example, it is always important to know roughly what your ETF’s NAV (net asset value) is at any given time relative to what the bid and ask is for the ETF in the secondary trading market. In a time of extreme market volatility, these levels could materially diverge and create a large premium or discount. It’s important to always think about trading quality and ask ETF experts before trading in this type of volatile market.
Liquidity refers to the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price.
Before investing, consider the fund's investment objectives, risks, charges, and expenses. Visit im.natixis.com for a prospectus or a summary prospectus containing this and other information. Read it carefully.
An exchange-traded fund, or ETF, is a marketable security that tracks an index, commodity, bond, or a basket of assets like an index fund. ETFs trade like common stock on a stock exchange and experience price fluctuations throughout the day as they are bought and sold. Short-term fixed income ETFs invest in fixed income securities with durations between one and five years.
All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income, money market, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.
The views and opinions expressed may change based on market and other conditions. This material is provided for informational purposes only and should not be construed as investment advice. There can be no assurance that developments will transpire as forecasted. Actual results may vary.
Unlike passive investments, there are no indexes that an active investment attempts to track or replicate. Thus, the ability of an active investment to achieve its objectives will depend on the effectiveness of the investment manager.
Diversification does not guarantee a profit or protect against a loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Asset allocation does not ensure a profit or protect against loss.
There are significant differences between mutual funds, SMAs and ETFs; including, but not limited to, how shares are acquired, costs, and tax efficiency. For ETFs and mutual funds, investors own shares of the fund – for SMAs investors directly own the SMA's underlying securities. ETFs and mutual funds are considered pooled investment vehicles in which all investors have the same underlying security exposure in a given product. SMAs grant investors ownership of the underlying securities themselves, which can enable further exposure customization. ETF shares trade on an exchange in the secondary market and price throughout the day; mutual fund shares are not listed on exchanges and only price at the end of the trading day. SMAs hold underlying security shares that mostly trade on exchanges and can be purchased or sold throughout the trading day. An ETF’s investment minimum is merely the market share price, mutual funds can have different share classes where investment minimums can vary, and SMAs typically have investment minimums that are higher than both mutual funds and ETFs. From a tax efficiency perspective, SMAs give investors the ability to manage individual securities directly for tax-loss harvesting. ETFs have the ability to take advantage of the in-kind share redemption process and secondary market trading to assist in tax efficiency. Mutual funds have limited ability to enhance tax efficiency due to their share redemption mechanism, though some funds are managed with tax efficiency in mind. Fees can differ across all three vehicles based on the total amount invested, differing acquisition costs, management fees and other factors. Please work with your advisor and consider these differences before investing.
ETF General Risk: ETFs trade like stocks, are subject to investment risk, and will fluctuate in market value. Unlike mutual funds, ETF shares are not individually redeemable directly with the Fund and are bought and sold on the secondary market at market price, which may be higher or lower than the ETF's net asset value (NAV). Transactions in shares of ETFs will result in brokerage commissions, which will reduce returns. Active ETF: Unlike typical exchange-traded funds, there are no indexes that the Fund attempts to track or replicate. Thus, the ability of the Fund to achieve its objectives will depend on the effectiveness of the portfolio manager. There is no assurance that the investment process will consistently lead to successful investing. Fixed Income Securities Risk: Fixed income securities may carry one or more of the following risks: credit, interest rate (as interest rates rise bond prices usually fall), inflation, and liquidity.
Interest Rate Risk: Interest rate risk is a major risk to all bondholders. As rates rise, existing bonds that offer a lower rate of return decline in value because newly issued bonds that pay higher rates are more attractive to investors.
Natixis Distribution, LLC (fund distributor, member FINRA | SIPC) and Loomis, Sayles & Company, L.P. are affiliated.
ALPS Distributors, Inc. is the distributor for the Natixis Loomis Sayles Short Duration Income ETF, the Natixis Vaughan Nelson Mid Cap ETF, the Natixis Vaughan Nelson Select ETF, and the Natixis Loomis Sayles Focused Growth ETF. Natixis Distribution, LLC is a marketing agent. ALPS Distributors, Inc. is not affiliated with Natixis Distribution, LLC.
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