Internet message boards are lighting up and certain stocks have seen some unusually dramatic price moves. David Mann, our Head of Global Exchange Traded Funds (ETFs) Capital Markets, ponders whether ETFs could be subject to similar volatility.
Like many people, I have been mesmerized by some of the dramatic recent market moves in stocks like GameStop Corp. and AMC Entertainment Holdings, which you can read about in the financial press. For this discussion, I really don’t want to rehash the impact of retail optimism, Reddit, and various internet message boards on the prices of these stocks—there are certainly plenty of other places to find such commentary.
For this article, I want to think through what would happen if the stock ticker lighting up everyone’s trading monitors was an ETF instead of a single stock.
Quick sidebar: For this discussion, I am only considering ETFs that hold an unlevered basket of stocks. These ETFs could hold stocks of a particular country, sector or theme. Inverse and leveraged stocks would just add another layer of complexity that we can revisit another day.
So, what would happen to our hypothetical ETF if it became the apple of the retail world’s eye? Could it possibly go from $30 to $100 in a single day?
First, let’s start with exhibit 1 and exhibit 2 to illustrate how this seems highly unlikely for ETFs:
- ETFs are open-ended funds
- The price of an ETF is based on the value of its underlying stocks.