Exchange traded funds track the performance of their underlying components. However, as the popularity of the investment vehicle grows, some ETFs are beginning to affect the performance of individual stocks.
According to S&P Capital IQ, ETFs may pose systemic risks, especially as investors pour more money into the investment vehicle than the individual stocks that the ETFs hold, USA Today reports.
The potential problems will likely occur during periods of high volatility when investors dump ETFs. Consequently, the robust selling pressures may overwhelm the actual stocks held in popular indices.
S&P Capital IQ points out that investors may notice an ETF’s influence in company stocks where the average daily dollar volume of trading is less than the stock’s weight in the index.
For instance, Exxon Mobil (NYSE: XOM) actual shares make up 0.78% of average daily dollar volume of trading, but it makes up about 1.9% of the S&P 500 index, along with S&P 500 related ETFs. Consequently, selling pressure on S&P 500 ETFs could put excessive pressure on the company stock.