Looking into the ETF structure, a group of Authorized Participants help facilitate seamless ETF trades by creating or redeeming baskets of underlying component stocks for ETF shares. [How ETFs Are Traded]
As more investors rely on ETFs to gain market exposure, large sell and buy orders may be affecting trades in the underlying securities. For instance, Goldman Sachs analysts found that the recent activity in energy sector ETFS has contributed to 15% of Chevron (NYSE: CVX) and 12% of Exxon Mobil (NYSE: XOM) average daily volume over the past three months. Additionally, instead of company fundamentals, ETFs contributed to 20% of the value of volumes in Vornado Realty Trust (NYSE: VNO) and 83% of the smaller Hecla Mining Co (NYSE: HL).
The analysts also highlighted the correlation between office REIT Boston Properties (NYSE: BXP) and iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR). Specifically, Goldman argues that IYR demand drove almost 10% of BXP trading per day over the past month and 20% of BXP’s value that traded over the past three months could have been affected by ETF demand and not individual investor’s opinion on fundamentals.
“It’s not surprising then given the large part of BXP demand that is ETF driven (IYR in particular) that BXP is 87% correlated with the IYR. This is far greater than how correlated other members of the IYR were to the ETF over the past year (66% on average),” Goldman analysts added.
For more information on the ETF industry, visit our current affairs category.