The benefit of ETFs

ETF liquidity has been a big focus since the coronavirus sell-off in March 2020 when fixed income ETFs started trading at all-time high discounts to net asset values (NAVs).

At the time, the benefit of the secondary market was clear to see. With securities in the underlying bond market hardly trading, ETFs acted as a source of price discovery and reflected changes in market sentiment faster than the NAV, which is calculated at the end of the day or not at all if the underlying market is closed. 

This occurred during the Greek debt crisis when the Athens Stock Exchange was closed between 26 June and 3 August 2015 but ETFs still acted as a source of price discovery as they were able to trade on the secondary market. 

When liquidity dries up

When the Moscow Stock Exchange closed on 25 February 2022, ETFs continued to trade on the secondary market and revealed the true extent of the carnage in Russian equities.

However, by 9 March, the situation had become so illiquid that exchanges across the globe had halted trading of Russia ETFs until further notice, shutting off the secondary market for the first time in history, cutting ETFs off as a form of price discovery and leaving them in a limbo normally reserved for mutual funds.

With the secondary market closed and no end in sight for a de-escalation in the Ukraine war and sanctions, asset managers closed their Russia ETFs.

Lessons learned

ETFs were landed in an unprecedented position. While the structure has proved its resilience over the years, Russia ETFs provide a useful case study into what can happen when liquidity vanishes entirely from a market that is under sanctions and at war with another sovereign state.