ETFs have become the “liquidity vehicle” amid market stress, says Bobby Eng
When markets seize up, institutional investors need somewhere to turn. And as one investment expert highlights, that somewhere is exchange-traded funds – also known as ETFs.
Bobby Eng has spent years watching how large investors behave during periods of market stress. He believes the pattern is now unmistakable as ETFs have emerged as the preferred liquidity tool when markets face turbulence.
Whether driven by geopolitical events, earnings surprises, or broader economic uncertainty, secondary market trading volumes for ETFs tend to spike during volatile periods.
"What we're seeing more and more is that exchange traded funds have become the liquidity vehicle in times of stress in the marketplace," said Eng, SVP and head of platform and institutional ETF distribution at Franklin Templeton Investments. “When there are times of stress, single names tend to cause more volatility. And liquidity may tend to dry up in those marketplaces. However, when you see exchange traded funds, it's the actual opposite where liquidity increases.”
Eng acknowledged the record-breaking growth across the ETF industry, with global assets now at $20 trillion, roughly $10 trillion in the US, and nearly $700 billion in Canada. Ahead of the new year, however, Eng cautions that investors will need to develop a more sophisticated understanding of ETF liquidity.
While many investors mistakenly equate trading volume with liquidity, he emphasized the two are distinct, adding that an ETF's true liquidity derives from its underlying holdings, not its visible trading activity.
What matters for Eng is implied liquidity, the amount an ETF can trade without moving the market, which often represents multiples of its average daily volume. While trading volume looks backward, implied liquidity looks forward.
Beyond liquidity, he flags several risks worth monitoring heading into next year, noting that concentration in mega-cap weighted indices poses a challenge, with the Magnificent Seven now comprising roughly a third of the S&P 500, a level that erodes diversification benefits.
Eng also expects markets to stay unsettled, with volatility driving investors to rethink how they allocate capital. He sees room for rotation into more economically sensitive and growth-oriented assets, as well as greater use of investment grade credit alongside high yield and bank loans. Private markets and alternatives, he argues, are likely to take a larger share of portfolios as institutions hunt for both returns and diversification.
He thinks the macro backdrop will be one of moderate global growth, easing inflation and ongoing central bank tightening, but with persistent geopolitical risk keeping volatility elevated.
Areas of ETF opportunity
Against that environment, he views non-US markets as relatively attractive.
"Emerging markets remain undervalued relative to the US with higher expected GDP growth rates," he said, adding that ETFs should remain a core tool for institutions seeking efficient exposure to these regions, as well as for day-to-day liquidity and cash management.
To that end, Eng believes emerging markets present a notable area of opportunity, with ETFs offering a practical path into otherwise hard-to-access regions. For Eng, India stands out as a prime example. Despite strong growth in the Indian market, foreign investors face significant barriers to trading local securities directly.
"Getting access to local Indian securities is a challenge. Money managers and any international investor need to go through extra hurdles in order to be able to trade directly into Indian securities," he noted.
According to Eng, tax treatment adds another layer of complexity. Following changes in 2024, international investors face a 20 per cent short-term capital gains tax and 12.5 per cent on long-term holdings, which Eng noted is unavoidable regardless of the investment vehicle used.
The actual tax burden depends on factors like the average age of holdings, fund turnover, and how tax lots are diversified across market periods. ETFs that have been around for several years can accumulate a range of tax lots, tilting distributions toward the lower long-term rate. That 8 per cent differential, Eng noted, represents a meaningful savings for investors.
Eng acknowledged the bulk of institutional ETF assets still flow toward low-cost, passive products tracking broad benchmarks like the S&P 500 or Canadian composite. These remain the default choice for liquidity management, transition strategies, and other core portfolio functions. But as Eng underscored, preferences are shifting.
"We're seeing a big tilt over the past little while, shifting more towards actively managed exchange-traded funds, factor-based ETFs looking at either single or multi-factor. There's thematic ETFs that institutional investors are now looking at as well," he said.
The appeal remains consistent - low cost and trading flexibility - but the product set has expanded well beyond traditional passive exposure. Eng emphasized that ETFs work best as complements to other tools rather than replacements.
"It's not one or the other, it's really a complement. And you can use them in conjunction, depending on what your goals are," he noted.
What’s in store for ETFs in 2026
Among the trends he's tracking, digital assets stand out as a space to watch.
"I wouldn't say that it's become mainstream by any stretch of the imagination,” he said. “When I say digital, that includes crypto, ETFs, etc. Whether or not institutional portfolios will accept them broadly has yet to be determined, but there's certainly more interest," he said.
He also anticipates a pullback from US equities. After a prolonged run, some view American markets, particularly the largest AI-related names, as overvalued.
Eng still expects institutional investors to shift capital toward Asia, Europe, and emerging markets. The case for reallocation strengthened in 2025, when emerging markets delivered returns north of 30 per cent, roughly double the US market's approximate 15 per cent gain. That kind of outperformance hasn't occurred in four or five years, said Eng, suggesting a potential turning point in how institutions think about geographic exposure.
According to Eng, fixed income ETFs will also require careful duration management as investors adjust positioning based on Federal Reserve actions, with rate volatility capable of significantly impacting bond ETF performance.
“Rate volatility can drastically affect bond ETF performance while derivative and leverage ETFs are sophisticated structures that can cause tracking, liquidity, and capital risks. Additional due diligence is required before investing,” noted Eng.
Education remains critical
Eng sees education as the primary barrier to broader institutional adoption. Much of his time goes toward explaining what ETFs are and how they can serve portfolio objectives - whether for liquidity management, transition strategies, cash equitization, or tactical and strategic allocation.
He pushes back on the idea that institutions are unaware of ETFs, underscoring “they just haven't considered them or used them in the past.”
He ultimately recommends working with ETF providers directly to understand their dynamics and achieve best execution for portfolios.
