ETFs Aren't The Reason Why Markets Are Volatile

ETFs have been gaining attention – both good and bad – with some naysayers arguing that the nifty investment vehicle has contributed to heightened market volatility. Don’t believe everything you hear.

Gregory Davis, chief investment officer of Vanguard, on Financial Times argued that there are a handful of reasons why index investing is not the source of a jittery market.

“The surging popularity of index tracker funds makes them an easy target, particularly as the potential cause of an event that has not yet happened. But that is not a valid reason to point the finger at them. If anything, these current criticisms reveal confusion about the nature of both markets and indexing,” Davis said.

Firstly, Davis pointed out that volatility and bear markets pre-date index investing as market crashes and corrections were a part of a healthy financial market long before the invention of index funds. The first such passive fund may be traced back to mid-1970s, or long after the famous stock market crash of 1929 or so-called Great Crash.

“The underlying causes of major market downturns usually lie in a combination of macro­economic imbalances and speculative investing,” Davis said.

There is no real discernible correlation between growth of indexing and market downturns – index funds attracted net inflows in both up and down markets.