ETFs amidst the COVID-induced technological transformation: Sectoral insights from time-varying dynamics of tail risk transmissions

Abstract

This study investigates the tail risk transmissions across a diverse range of US commodity & tech-driven sector ETFs and the underlying US stock market by employing the CAViaR-based TVP-VAR methodology on daily data from January 01, 2019, to August 17, 2023. Findings reveal that Covid-19 triggered a notable surge in the total connectedness, consequently amplifying the tail risk transmissions within the system. Moreover, the S&P 500, AI&Robotics and fintech sector ETFs stand out as the primary risk transmitters, while cybersecurity and blockchain sector ETFs are risk receivers within the system, except for a notable shift during the peak of the pandemic. The pairwise results reveal limited risk transmissions between the S&P 500, AI&Robotics and fintech sector ETFs; however, both sector ETFs stand out as potential risk transmitters for the VIX index. In contrast to energy, agriculture and base metals sector ETFs, which are persistent risk receivers for both stock market indices and tech-driven sector ETFs, precious metals sector ETFs appear somewhat isolated and therefore offer a potential source of diversification among commodity sector ETFs. In sum, our findings offer valuable sectoral insights for effective risk management and portfolio diversification strategies in dynamic market conditions.