Index ETFs Supports a More Vibrant Market

ETF trading remains low by BlackRock’s estimates. Index-backed funds turn over $460 billion per year or 7% of total assets under management, compared to the $10 trillion or 80% of assets for active funds. Even if asset flows into passive outstrip the competition, the current volume suggest they are not setting prices at the margin.

Related: How Quality Dividend Grower ETFs Can Help Fight the Crosswinds on Wall Street

ETFs also help contribute to greater market efficiency through price discovery. For instance, international ETFs are trading in U.S. exchanges during hours when the underlying foreign markets are closed. The Greece ETF is a standout example as it managed to trade in the U.S. during the two weeks when Greek markets and banks were closed during the 2015 “Grexit” crisis. Furthermore, the Egypt ETF was still operating as usual after Egypt’s market closed in response to the so-called Arab Spring.

Furthermore, BlackRock pointed out that more fund managers are seeking diversified indexing strategies, which could help assuage the issue of market cap-weighting that leads to overcrowding in the biggest stocks. The growing popularity of smart beta ETFs that track indices screened for fundamental or alternative measures other than market capitalization should help offset some of the worries caused by passive indexing.

For more information on ETFs, visit our ETF 101 category.