Are ETFs to Blame for Market Volatility?
December 8th at 3:30pm by Tom Lydon
The introduction of exchange traded funds (ETFs) and “emini” futures have supplemented the traditional configuration of derivative and proxy instruments for the markets and expanded the availability of speculative and hedging tools to investors and traders having a direct impact on the market. But do ETFs deserve to be blamed for the market volatility we’ve seen this year?
Many investors believe that ETFs, especially the ultra or 3x funds, such as Direxion Shares ETF Trust Large Cap Bull 3X (BGU), are to blame for the roller coaster ride in market volatility that is being seen on Wall Street. This is actually not the case.
A research study conducted with data from LakeView Asset Management LLC, suggests that it is in fact futures that influences the activity of speculators and hedgers and therefore is the indicator for market volatility and manipulation, states Scott Rothbort for the Street.com.
Several hedge funds and risk-averse investors use ETFs as an insurance policy, but this still doesn’t mean that index ETFs and their derivatives will have a pivotal influence on individual stocks. Instead, they will more likely impact the indexes that they track. For example, Exxon Mobil (XOM) represents 5.42% of the S&P 500, so using an ETF to influence this company’s stock would be challenging.
A remedy to this predicament could be the use of sector-specific ETFs, Rothbort says, where no futures are available. Moving these ETFs in a particular direction will have an offsetting effect on the underlying shares of the ETF, options on the ETF or options on the underlying stocks making it much easier to manipulate the price of an individual stock.
It is apparent that both ETFs and futures are heavy hitters and could make or break a trading day.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.