While Europe is falling apart, it’s interesting to see how trading volume has been affected. Undoubtedly, there can be major fluctuations in ETF inflows and outflows depending on investor risk appetite
In this discussion, ETF trading volume is analyzed, noting that volume in the U.S. has hit a low not seen since 2007. As we’ve witnessed, there has been lower volatility in markets as of late with hedge funds possibly pulling back in their usage of ETFs. Furthermore, there’s a question of what effect financial regulation has had on ETF trading.
On one hand, we’ve seen investors flock toward Treasuries because although volatility isn’t high, risk certainly is. It’s possible that investors are using direct fixed income instruments rather than fixed income ETFs to reduce their risk exposure. However, continued upward momentum might prompt investors to increase their equity allocation via ETFs.
Although it might be tempting to pick individual stocks during a short-term upswing with the hopes of choosing a home run winner, ETFs offer the necessary diversification within an asset class during high risk periods such as now.