Following the Covid-19 outbreak and its effect on financial markets, BETTER FINANCE was quoted in different European press outlets on the need to keep markets open and the difficulties facing index funds in these difficult times.”
So, what kind of resilience can we expect from "trackers" in a market that’s in freefall, down by 40% in just four weeks?
Tracker funds, also known as index funds, are designed to provide investors exposure to an entire index at a low cost. These funds seek to replicate the holdings and performance of a designated index, constructed as ETF´s or alternative investments to meet the fund’s tracking objective. Trackers help to make investments clearer and easier.
9 March 2020 was officially the worst day for financial markets all around the world since 2008, when a financial crisis fuelled by a default rate in the U.S. subprime mortgage sector, caused a general recession around the globe.
Now, the increasing uncertainty and volatility in financial markets, caused by the oil trade war and exponentially augmented by the COVID-19 pandemic, has led to extreme price fluctuations of bonds and multiple suspensions of financial markets.
This naturally affects the performance of trackers.
But closing the financial markets is not the answer as this would have a devastating impact on the European economy. The fragility of the economy is such that even persistent rumours about closing the markets are themselves causing adverse effects.
To bring this to the attention of decision-makers in Europe, a group of 10 associations representing financial services companies, exchanges, funds and consumers, and other stakeholders, has written to European and national policymakers about the need to keep European markets open during the COVID-19 crisis.
The policymakers were urged to produce a joint statement “to signal that European markets will continue operating is essential to build market confidence, and to emphasise that markets are needed most during times of economic uncertainty”.
With regard to tracker funds, Guillaume Prache, Managing Director of BETTER FINANCE, and one of the 10 signatories of the letter to European and national policymakers, said that "in the case of large redemption requests, index funds will not have more or fewer problems than any other unlisted and actively managed fund".