Trading volume in ETFs indexed to the S&P 500 is set to surpass activity in the underlying stocks as more investors trade the entire basket rather than pick individual companies, according to a report Monday.
Combined dollar volume in SPDR S&P 500 (NYSEArca: SPY), iShares S&P 500 (NYSEArca: IVV) and Vanguard S&P 500 ETF (NYSEArca: VOO) hit a one-year average of $28 billion daily in July, or 98% of the trading in the benchmark’s underlying components, Bloomberg News reports.
Traders are increasingly opting to trade entire indices rather than choosing individual stocks as volatility and market correlations ratchet up in the wake of the financial crisis. Meanwhile, more investors are using passive strategies rather than active mutual funds that charge higher fees and often underperform their benchmarks.
“There’s been a big shift, with a lot of large investors moving away from active investment to passive,” said Guy Fraser-Sampson, a senior fellow at Cass Business School in London, in the Bloomberg article. “There is a growing recognition now that it is very difficult for active equity investors to consistently outperform. A lot of long-only managers do not justify their fees.”
“What we have seen is more trading in basket-type securities, where you are trying to adjust asset allocations and not trading individual securities as such,” added Joel Dickson, investment strategist at Vanguard, which is the third-largest ETF provider. “You are getting the diversification and risk exposure to the asset without the additional volatility of the securities.”
Vanguard S&P 500 ETF
Full disclosure: Tom Lydon’s clients own SPY.
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