“We believe that altering allocations — even when using plain-vanilla index funds (which by the way are ultra low-cost and highly liquid) — is a more powerful strategy than trying to understand business fundamentals of a few companies better than others,” ETFreplay.com said Monday. For investment advisors, “it is the basic big-picture allocation that is the most important part.”
Year to date, U.S.-listed ETFs have seen positive flows of $69 billion, or just over 6% asset growth in 2011, according to ConvergEx Group.
“More recently, hedge funds have increased their use of ETF products to pursue a variety in investment goals,” said Nicholas Colas, chief market strategist at ConvergEx. “Some use market index products such as the SPDR S&P 500 ETF (NYSEArca: SPY) or sector funds to hedge the ‘long’ side of their books. Others use volatility products to speculate on market direction, or commodity funds to diversify into asset classes outside their traditional long/short equity strategy.”
Yet as the ETF business hits $1 trillion in total assets and climbing, some allege the financial products are making markets more volatile.
The flash crash “saw a greater percentage of bad prints in ETFs than single stocks,” Colas wrote in a report. “There’s a chicken-and-egg feeling to this worry, to be sure, and at its core this particular concern is really more about market structure than the role ETFs themselves play in capital markets.”