Focus: Exchange traded funds (ETFS)

Focus: Exchange traded funds (ETFS)
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Updated 24 April 2020

Focus: Exchange traded funds (ETFS)

Focus: Exchange traded funds (ETFS)

What happened

US first-time jobless claims for the week ending April 17 came in at 4.4 million, which brings the total to 26.5 million. Several economists predict the unemployment rate to rise to 20 percent, double where it stood after the 2008 financial crisis.
This has huge ramification for the US economy, where consumption contributes 70 percent to gross domestic product (GDP). The US is the world’s largest economy and its import market matters to the rest of the world, although it is becoming more protectionist — a tendency that will likely increase once we come out of the lockdown.

US Congress passed the $484 billion coronavirus aid package. A video conference of EU leaders approved the €540 billion ($582 billion) relief package to come into effect on June 1. A further relief package was discussed with more unanimity than in previous discussions, which even Italian Prime Minister Giuseppe Conte acknowledged. There was no decision and its design are unclear as of yet.
Northern countries still oppose the mutualization of debt and southern states still favor it. Consensus is emerging in favor of any new package being financed in part via the EU budget. Both German Chancellor Angela Merkel and EU Commission President Ursula von der Leyen supported this route. Southern states (Italy, Spain) ask for rescue funds to be provided as grants rather than loans, so as not propel their debt-to-GDP ratios through the roof.
European Central Bank President Christine Lagarde voiced her concerns that the euro zone economy could contract by as much as 15 percent in 2020.
Boeing announced that it would half its production of the Boeing 757 Dreamliner, reflecting declining demand. The company will announce layoffs in conjunction with earnings later next week.
Nestle’s first-quarter sales rose by 4.2 percent in line with changing consumer behavior, as frozen foods sales soared ahead of the lockdown.
Both companies discarded guidance highlighting uncertainty and the lack of predictability regarding the shape and speed of recovery and how it will affect consumer patterns.


The dramatic slide of WTI crude into negative territory at the beginning of the week highlighted the effect of exchange-traded funds can have on the real economy.

Oil exchange traded funds had seen huge inflows in the weeks leading up to April 20 because investors were betting on the bottom of the oil price.

The biggest oil ETF, the United States Oil Fund (USO), which manages more than $4 billion, was badly hit by the downturn of the WTI. By Wednesday, it was down by nearly 80 percent year to date. As a result, the USO is shifting focus to later durations and is considering other energy futures.

The USO experience has shown two things. First, depending on their cumulative size, ETFs can exacerbate price developments in the underlying asset, especially when the they are based on derivatives. We have seen similar developments in the currency and fixed income markets.

Second, ETFs which use leverage and/or have derivatives as the underlying assets are more prone to fluctuations in line with the volatility of the underlying asset, which turns them into riskier investments.

Where we go from here

US markets saw a drop on Thursday as a Chinese trial of one of Gilead’s COVID-19 drugs failed. This showed how focused markets are on finding a vaccine and medicines for COVID-19, because they determine the timing and shape of any recovery. Vaccines and medicines are the only guarantor of avoiding starts and stops of a recovery. In the meantime, economic recoveries are bound to be sporadic and slow. While most advanced counties have passed the peak of the current outbreak, Singapore teaches us how quickly the virus can take root again be it from marginalized populations or through loosening social distancing too quickly. Testing and contract tracing help, but are no substitute for a vaccine.

— Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources.

Twitter: @MeyerResources