Exchange traded funds have been accused of being the reason for some of the wild market swings that occur. Are these funds the real culprit behind market volatility?
ETFs have gained popularity over the years, due to their diversification benefits and low cost. The flexibility to trade a basket of stocks throughout the day is enticing for many. According to Investment Company Institute data, there are more than 1,110 ETFs trading in the U.S., up from about 200 that traded in 2005, reports Scott Cendrowski for CNN Money. Furthermore, ETFs now account for 30% of trading volume on U.S. exchanges.
“As these products have increased, correlations have been increasing every year,” Harold Bradley, chief investment officer of Ewing Marion Kauffman Foundation, said. However, there is no hard evidence that ETFs are the cause for market volatility.
ETFs are an easy case to take the blame because they are relatively new on the scene, but much of the ETF trading that takes place never results in the actual buying and selling of the funds’ underlying stocks, says Morningstar. The actual basket of shares are trading but the contents, or stocks within, don’t actually trade. [Using ETFs to Gauge Market Sentiment]