The sector ETF is extremely liquid with low fees, and traders can reduce single-stock risk if one company blows up. There are also industry-specific ETFs for technology, utilities, consumer staples and various other sectors.
Lutz says that all of these ETFs purchasing up shares of stocks they’re meant to track is causing the actual, “tradable” float to be a lot smaller than the official number suggests.
“Because there are less shares of certain stocks ‘warehoused’ by ETFs being traded in the market, trading in those names will be less liquid than the ‘float’ number would normally indicate and, as a result, will be more volatile,” according to the BI report.
“Lutz takes his own firm, Stifel Nicolaus, as an example. The official float on Stifel stock is 49.7 million shares. ETFs hold 6% of those shares. Passive index funds hold another 16 percent of SF shares,” it added. “That means a total of 22% of SF shares are being ‘cannibalized’ by the ETFs and index funds that hold them, says Lutz, and investors in individual stocks need to adjust their calculations accordingly, or get caught off guard by unexpected volatility and decreased liquidity.”