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]
ETFs are quickly becoming recognized as a tool that can blur the lines between equities and other asset classes, because they themselves are baskets of equities that may have underlying assets such as fixed-income, currencies or commodities, explains Bryan Johanson at Traders Magazine. [U.S. News Names ‘Best Fit’ ETF Rankings]
The proliferation of ETFs among traders is creating the need for more short term investors to become knowledgeable about fixed income, global equities and commodity markets, according to the article. Some firms are even creating an ETF-specific trading desk, reports James Armstrong for Traders Magazine. [ETFs As Tactical Investing Tools]
Growing market volatility has also contributed to the growth of the ETF business.
About 62% of financial advisors have turned to using ETFs in conjunction with active management to help mitigate risk. According to an Invesco study, the widespread adoption of active and passive asset allocation strategies is helping to boost growth for the ETF industry, reports the Financial Times.
Tisha Guerrero contributed to this article.