The rise of exchange traded funds has forced more single-stock traders to understand how the products work and increased their knowledge of new asset classes since ETFs cover so many parts of the market, according to a report.
Although the rivalry between ETFs and mutual funds gets a lot of attention, some of the increased trading in ETFs is being driven by traders using the products in place of single stocks.
For example, they can buy an ETF for healthcare or energy to get exposure to the overall sector rather than picking individual companies. This also cuts down single-stock risk in case a company blows up.
The ETF business has grown into a $1 trillion industry.
“Now you have a ton of volume in hundreds of ETFs that are out there,” Paul Weisbruch, vice president of ETF/options sales at Street One Financial, said. “There’s a lot of communication between desks and departments where they can hedge off exposure and probably more seamlessly get big trades done from asset class to asset class.”
Compared to the rest of the market, ETFs have managed to grow, evidenced by higher volume and assets under management. Early in 2011, ETFs accounted for 25-30% of trading volume. As ETF trading volume has grown, traders have shifted their focus on these tools. [Five Things to Consider When Choosing ETFs]