Coming into 2020, investors had gone more than a decade without seeing a true bear market. That streak came to an end quickly, though, with worries about the economic impacts of the coronavirus pandemic sending stock prices sharply lower and making many people nervous about how deep an economic recession could be even after the outbreak gets under control.
Yet even with the big hit to stocks, there's one sign that investors haven't lost their cool. Rather than succumbing to panic, many investors are thinking opportunistically, looking for ways to take advantage of cheaper share prices. The clearest sign of that confidence comes from the exchange traded fund market, and it's providing some much-needed support in a market that might otherwise have seen even more volatility than it did.
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The long-term success of ETFs
The rise of the ETF industry has been stunning. In just the past 10 years, assets in ETFs listed on U.S. stock exchanges quadrupled to more than $4 trillion as of the beginning of 2020. The vast majority of those assets remain invested in the stock market, with roughly three-quarters of all stock ETFs invested in U.S. equities.
Despite its success -- or perhaps because of it -- ETF investing has gotten a lot of criticism. Some argue that mindlessly following an index of stocks rather than hand-picking the best companies available is the wrong approach to investing. Those critics predicted that the long bull market supported the massive inflows into ETFs, and when a bear market inevitably hit, those unsophisticated investors would be the first ones to dump their ETF shares and run for cover. That in turn could produce a chain reaction, because falling popularity among ETFs would force the funds to sell their shares of their underlying holdings -- even though they'd already fallen sharply in price.
Investors stay the course
Yet that predicted flight from ETFs simply hasn't happened yet. So far in 2020, more than $68 billion has flowed into ETFs, according to the latest figures from ETF.com. Fully half of that amount has gone into U.S. and international stock funds, while ETFs specializing in bonds and commodities have each seen inflows of more than $10 billion year to date. Even leveraged and inverse ETFs -- some tied to stock investments -- have gained in popularity in 2020.
That said, investors have been fickle over shorter periods of time. For instance, in the week ending April 3, major stock ETFs SPDR S&P 500 (SPY 0.95%), Invesco QQQ Trust (QQQ 1.54%), and international stock giant iShares MSCI EAFE (EFA 0.80%) all saw significant outflows. Yet even then, some other stock funds, such as iShares S&P 500 Value (IVE -0.17%), enjoyed new popularity and attracted significant inflows.
The right approach to investing
The numbers suggest that investors are using traditional stock ETFs the way they were intended. By regularly committing new money to purchase ETF shares, investors can lock in bargains when they arise while maintaining a disciplined strategic approach to their long-term investing. That in turn can keep investors on track for their financial goals -- even with the pressures that falling stock markets are putting on people's finances in the short run.
Many investors use ETFs to get exposure to some of the top stocks in the market, enjoying the automatic diversification that investing in an ETF with many holdings in its portfolio gives them. Far from being unsophisticated, these ETF investors are showing that they're in it for the long haul -- and they're willing to go the distance even in tough market conditions. That bodes well for an eventual market recovery after the coronavirus crisis passes.
