Much is made of the rivalry between exchange traded funds and traditional mutual funds. However, a bigger and more important trend in the market could be traders using ETFs to make bets on entire sectors rather than individual stocks.

Dave Lutz, an ETF strategist at Stifel Nicolaus, says the ETFs that have become so popular among traders are “cannibalizing” the stocks that they are designed to track, resulting in choppier trading for investors in the underlying shares, reports Matthew Boesler at Business Insider.

At the end of the third quarter, there were 1,465 exchange traded products in the U.S. with total assets of $1.3 trillion, according to BlackRock. The business gathered inflows of $135.5 billion year to date.

As the ETF industry continues to grow at a rapid pace, some have argued that the financial products are boosting volatility and correlations in the market, although such claims are difficult to prove.

Yet one clear trend is that more traders are substituting ETFs for individual stocks in their strategies. For example, they can buy a financial ETF such as Financial Select Sector SPDR (NYSEArca: XLF) rather than an individual company such as Citigroup (NYSE: C) or Bank of America (NYSE: BAC).

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