ETF Edge

'Things are normalizing': ETF market action is 'encouraging' despite economic worries, investor says

Trading volumes and volatility drop as Wall Street eyes a market inflection point
Trading volumes and volatility drop as investors await market inflection point

Have ETFs found their footing?

Trading volumes in popular exchange-traded funds including the SPDR S&P 500 ETF (SPY) and the iShares Russell 2000 ETF (IWM) are down some 30% from their levels two weeks ago. Industry analysts said Monday the ETF market seems to be moving past the extreme volatility and uncertainty that have pressured it in recent weeks.

The SPY climbed nearly 2% early Tuesday, and the IWM jumped over 2%. In addition, the market's fear gauge, the Cboe Volatility Index, was up more than 1%.

Add in the Federal Reserve's efforts to stabilize markets and there's a lot to find "encouraging" about the ETF market's recent action, said John Davi, founder and chief investment officer of Astoria Portfolio Advisors.

"Things are normalizing," Davi told CNBC's "ETF Edge" on Monday. "The Fed, with their announcement that they are dropping interest rates to basically 0%, buying corporate bonds, buying more Treasurys, that really kind of helped provide some stability to a lot of the dislocations that we were seeing in the marketplace."

Davi also said he was encouraged by the "orderly" trading in the ETF market, as opposed to several weeks ago, when bid-ask spreads were blown out by the unprecedented volatility.

"I think, overall, things feel a little bit more normal. I know the economic front is going to look pretty bad and it's going to look real ugly in terms of unemployment claims, but price action on the ETF front has been encouraging," Davi said. "There's actually been more inflows into ETFs, too. So, Vanguard took in a bunch of money in Q1 and I think [it] shows that the retail investor has been kind of hanging in there for the most part."

Ed Rosenberg, senior vice president and head of ETFs at American Century Investments, agreed that the market is moving toward a state of "calm" as volumes drop and spreads tighten.

"It seems that the market just needed some time ... to settle into the reality of what's going on," he said in the same "ETF Edge" interview.

Now, with that reality in focus, investors are "looking for signs here and there to jump back in," Rosenberg said.

Stocks climbed for a second day on Tuesday as investors cheered an apparent slowdown in new coronavirus cases around the world. The VIX has shed more than 23% in the last week.