Courtesy of John Spence

A surge in exchange traded fund trading this week signals that investors should buckle up for a volatile summer.

ETF trading soared to about 40% of overall volume on Thursday, one day after Federal Reserve Chairman Ben Bernanke said the Fed may soon begin tapering its purchases of $85 billion a month of Treasury bonds and mortgages. The Dow Jones industrial average plunged 354 points.

“My ETF-monitoring screens were lit up like a Christmas tree,” said Chris Hempstead, director of ETF execution at WallachBeth Capital, in a daily update Thursday. “Almost every ETF on my radar was trading at multiples of a normal day’s volume.”

He said it’s not uncommon to see a few ETFs have trading volume that high on a given day. But Thursday’s action “was something I have never seen before,” he said.

Volume in an unprecedented number of ETFs topped $1 billion for the session, he added.

The largest ETF, SPDR S&P 500, traded about 300 million shares, its highest one-day volume in more than a year.

Trading also surged in volatility-linked ETFs, such as iPath S&P 500 VIX Short-Term Futures ETN, which some traders use as short-term hedges, or to speculate on stock sell-offs. Continue reading →