Trader Talk

Here's why ETFs are a growing part of total trading value

Traders work on the floor of the New York Stock Exchange.
Lucas Jackson | Reuters

Many people have asked me how important ETF's are. The simple answer is, they are important and getting more important.

They are a significant portion of trading activity on all the exchanges. How important? Volume is not the right metric to use when dealing with ETFs. It's better to use "traded value," which as the name implies is the actual dollar value of what is traded.

In June, ETF trading was close to 28 percent of total daily exchange value, according to Credit Suisse. That's the most since March.

More importantly, it's a 35 percent increase from last June.

What's going on? Partly, it's just more money continuing to flow into ETFs from mutual funds. The industry is moving toward $3 trillion in assets under management.

There's also been much heavier trading activity in European ETFs thanks to the weak euro, which unleashed a tsunami of trading in the first part of the year.

Finally, Greece is back on everyone's radar, so broad European ETFs like the iShares Eurozone ETF (EZU) and the WisdomTree Europe Hedge ETF (HEDJ) and even single country ETFs for Spain (EWP), Italy (EWI) and France (EWQ) have seen much heavier volume.

In fact, ETF trading on Monday was 37 percent of exchange traded value, the highest level since December.

Here's an important point about ETFs: when volatility is spiking, traders use ETFs to hedge their exposure. Higher volume!

By the way, ETFs have passed another test. The Greek stock market has been closed all week, but the Global X Greece ETF (GREK), a basket of Greek stocks that trades in the U.S., has been operating smoothly.

It has become THE price discovery mechanism to figure out what the value of Greek stocks are. It's down 9.5 percent for the week.