As the use of exchange traded funds (ETFs) proliferates, investors have lauded their convenience. As with anything, though, there are those who will always remain unconvinced.
The biggest complaint against ETFs have been that correlations are going up, remarks Random Roger. The argument goes that for each new creation unit, the underlying equities would need to be purchased for any fund. Funds that cover the same area of the market may have overlapping holdings, which makes everything more interconnected. [ETFs: What You Should Know.]
Whatever the issues, though, Roger says there are still a lot of benefits to ETFs. We agree, naturally.
Stocks on the S&P 500 have a .81 correlation with the general stock market, or 81% chance follow the market’s ups and downs, writes David D. Moenning for iStockAnalyst. Critics of ETFs point out that the growing volume traded in ETFs has only worsened the effects of correlation between individual stocks and the overall market.
Harold Bradley, CIO of the Kauffman Foundation, believes that “we are at a point where a knock-on effect with a tightly coupled system between ETFs and individual securities are creating a very high correlation — and I think we are in imminent danger to the market that we saw in the flash crash.” [Have ETFs Replaced Stock Picking?]