A recent report fingered exchange traded funds (ETFs) as the financial instrument that will cause the next market meltdown, but are ETFs really the wolves in sheep’s clothing that the report makes them out to be?
The report, written by researcher Harold Bradley and Robert Litan at the Kauffman Foundation, an institute that supports research on entrepreneurship, claims that ETFs are “radically changing the markets,” which may result in a “panic-driven market meltdown,” according to The Wall Street Journal. [Kauffman Report Riddled With Untruths Regarding ETFs.]
Of course, the report does have its own shortcomings and is riddled with glaring inaccuracies.
The authors of the report argue that ETFs have over concentrated the ownership of thinly traded stocks, led to escalating number of trading failures and could trigger another major oscillation in the markets, similar to the May 6 “flash crash.”
First off, most ETFs are created to keep a portfolio that closely reflects an index and “no one stock represents a large portion of the typical ETF,” remarks Gus Sauter, chief investment officer at Vanguard Group. [ETF Criticisms: Fact or Fear?]