Dispelling Misconceptions on ETFs' Place in the Market

  • ETFs do not contribute to market volatility and will hold up in times of market stress, according to Vanguard expert
  • Global ETF industry represents about $3 trillion in assets, compared to the $300 trillion in financial assets over all
  • Data shows ETF activity only drives a small percentage of volume for most stocks

As the exchange traded fund industry grows in size and accumulates over trillions of dollars in assets under management, some are concerned that the investment vehicle is beginning to sway markets or won’t hold up in times of severe stress.

However, Joel Dickson, Head of Investment R&D at Vanguard Group, argued on the Financial Times that ETFs do not contribute to market volatility and will hold up in times of market stress, despite some concerns about the investment vehicle.

First off, Dickson points out that the global ETF industry represents about $3 trillion in assets, compared to the $300 trillion in financial assets over all. Given the relatively small size compared to the rest of the financial market, Dickson argues that there would have to be something we aren’t seeing in ETFs for them to sway market volatility.

ETFs, like stocks, trade on a stock exchange through a broker. This secondary market is responsible for most of the trading volume in ETFs. Dickson points out that in the U.S., daily data shows that the median ratio of ETF trading voluem that took place on the secondary market was about 94% for equity and 83% for bonds.

“The net result is that most ETF shares are traded between investors and do not result in any activity in the ETF portfolio,” Dickson said. “Based on this data it’s hard to argue that ETFs are a cause of market volatility. Niche products might have an impact in low-volume asset classes. But for the overall equity and bond markets, the answer has to be no.”