ETF Trading During Post-Election Uncertainty

As we digest the results of the US elections on November 3, the markets could be in for some volatile times ahead.

    David Mann

    David MannHead of Capital Markets, Global Exchange-Traded Funds (ETFs),Franklin Templeton

    As we digest the results of the US elections on November 3, the markets could be in for some volatile times ahead. David Mann, our Head of Global Exchange Traded Funds (ETFs) Capital Markets, thought it apropos to offer a reminder of some good trading practices amid times of uncertainty.

    The US elections are finally here, and anyone looking for any final insightful political commentary is going to be extremely disappointed. This is an ETF blog after all.

    There is one prediction that I am somewhat comfortable making about this election—there is a lot of potential uncertainty.

    • Who will win the presidential election?
    • Will the winner be known when markets open on Wednesday?
    • Which party will control the Senate?
    • How will the market react to each of those answers?

    Given this potential uncertainty, we wanted to dust off some of the blogs from earlier this year that discuss trading during times of heightened market volatility.

    • There is a difference between market uncertainty and market volatility.

    We talked about that concept in our blog, “ Viewing Volatility Versus Uncertainty,” and as we stated in that post:

    “Investors should consider avoiding trading ETFs during times of market uncertainty.”

    The most likely time of market uncertainty will be the market open on Wednesday, November 4. Until ETF market makers have had time to digest all the overnight information, ETF spreads during the start of Wednesday’s trading session could be wider than normal. We would recommend waiting for the spreads to be closer to their normal levels before trading.

    However, if that is not an option for whatever reason, then please remember our second bit of advice for trading during volatile markets:

    • If ETF spreads are wider than normal, pick up the phone and discuss the expected price.

    As we talked about in our blog, “The New Normal for ETF Trading”:

    “If bid/ask spreads in an ETF are wider than you are accustomed, do not panic! Simply call/email the ETF issuer’s capital markets desk and/or your ETF liquidity provider of choice, and they will help guide you on the expected price you could buy or sell your ETF.”

    Keeping these two concepts in mind should help you navigate any market event in the days following the election. Happy trading!

    What Are the Risks?

    All investments involve risks, including possible loss of principal. Generally, those offering potential for higher returns are accompanied by a higher degree of risk. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. For actively managed ETFs, there is no guarantee that the manager’s investment decisions will produce the desired results.

    ETFs trade like stocks, fluctuate in market value and may trade above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns. ETF shares may be bought or sold throughout the day at their market price on the exchange on which they are listed. However, there can be no guarantee that an active trading market for ETF shares will be developed or maintained or that their listing will continue or remain unchanged. While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.

    For more information on any of our funds, contact your financial advisor or download a free prospectus. Investors should carefully consider a fund’s investment goals, risks, sales charges and expenses before investing. The prospectus contains this and other information. Please read the prospectus carefully before investing or sending money.