As a result, traders will have less incentive to bid for the stocks in anticipation of future earnings increases, so the individual stocks become less responsive to new company updates.
The study also revealed that the number of analysts covering a stock has declined as ETF ownership of a company stock increases, which has left out insightful opinions or data points that would have made it “more likely to converge on the truth if you have more people searching for it,” Suhas Sridharan, one of the paper’s authors and a professor of accounting at UCLA, told the WSJ.
Lastly, with less company-specific analysis floating around, stock price movements will be largely affected by industrywide or general market moves, which helps explain the greater correlation between equities. The study discovered that when ETF ownership of a company stock rises, price moves are more in line with broad market or industry groups. [Increased Index ETF Usage Promotes Stock Correlation Across the Board]
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Max Chen contributed to this article.