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Brexit pushes ETF trading to record highs

ETFs rack up their highest single trading day on record in Brexit aftermath
July 14, 2016

Brexit has caused the biggest ever trading event for London-listed exchange traded funds (ETFs), which notched up their highest-value trading day.

Investors racked up an order book turnover of £1.3bn across 25,000 trades on the London Stock Exchange (LSE) on 24 June - the highest single day of trading on record, according to new figures from the LSE. ETFs catapulted into the top 10 traded products on LSE's order book for the first time as investors piled in to capitalise on market volatility.

The volume of ETF trades in June 2016 totalled £41.2bn, up 88 per cent on the volume in June 2015. And the value of ETF trades placed on exchange over the first half of this year were 50 per cent higher than the same period last year.

ETFs were already surpassing records for trading volumes and assets invested preceding Brexit, but surged to new levels in the aftermath of the vote. By the end of May 2016 ETFs and exchange traded products (ETPs) listed globally had topped their previous record, reaching $3.1 trillion (£2.3 trillion) dollars of assets invested, according to research company ETFGI. Since then, assets have continued to pour into products and 16 new ETFs and ETPs have been listed on the LSE.

In June 2016 iShares Core FTSE 100 UCITS ETF (ISF) was the most traded ETF with a £328.3m turnover, the seventh most traded of all products on LSE's order book. The FTSE 100 soared in the days following the vote, as investors piled into international-facing businesses listed in London they thought were likely to benefit from cheap sterling. This happened at the same time as many other investors piled out of the FTSE 100 in favour of assets they considered to be safer such as gold, which has experienced large inflows.

Ursula Marchioni, chief strategist at iShares EMEA at BlackRock, said last week: "Investors did not seem to be immediately reacting to Britain's vote to leave the European Union, having seen just $72m leave UK equities post announcement.

"However, there was a clear rotation out of UK mid caps (FTSE 250) and into UK large caps (FTSE 100). With just 21 per cent of revenues being derived from UK operations for FTSE 100 companies versus 58.6 per cent of revenues from the domestic market for FTSE 250 companies, investors are clearly trending towards large caps given the greater exposure to internationally focused revenues among domestic uncertainty."

 

What it means for you

ETFs are often seen as a good way to invest in volatile markets because of their low cost and liquidity. Due to the large trading volumes, they are easy to get in and out of, and do not have to sell underlying assets to redeem investor redemptons like unlisted open-ended funds. Despite problems in the US last year that caused ETFs to briefly become dislocated from the value of their underlying holdings, they have held up well in the UK in times of market stress and their proponents argue that these funds have proved their mettle as liquid investment tools.

Some of the most traded ETFs since the vote for Brexit have been leveraged and short ETFs, which are used by institutional investors for tactical trades. But these are risky for private investors: leveraged ETFs allow investors to multiply their bets on the movement of an index, and short ETFs benefit investors if prices decline. But while these more complicated ETFs can earn investors large sums, they require careful monitoring and can lose large amounts if the bet goes the wrong way.

A bet on the most traded iShares Core FTSE 100 UCITS ETF would have earned investors a return of 5.4 per cent over the month, and in the year to date the ETF has returned just under 10 per cent.