ETFs regularly re-adjust their holdings over the year to bring their underlying components in line with their benchmark indices, potentially affecting billions of dollars in one go and reflecting the importance indexing plays in the ETF industry.

For example, the iShares Edge MSCI USA Quality Factor ETF (Cboe: QUAL) saw $1.5 billion in redemptions on a single day last week, its largest outflow over its six-year history, the Wall Street Journal reports.

Investors did not suddenly dump the ETF on whim. The outflows were part of a $3 billion two-way trade that began days earlier and had little to do with prevailing market sentiment over the ETF investment strategy.

The catalyst to the sudden flows was attributed to the underlying index provider, MSCI Inc. as QUAL’s underlying benchmark underwent its semiannual rebalancing, which triggered massive money moves as portfolio managers realigned holdings to the updated index.

The outsized shifts in money reflect the growing importance of index providers as low-cost passive investing gain in popularity and more investors become reliant on index-based funds. According to Morningstar data, there is now almost as much money in U.S. stock index-based funds as there is in active fund management.

While ETFs aren’t the biggest index-based players on the block, they are still the most visible due to their transparency and day-to-day tradability. Unlike mutual funds or other large institutional investments, ETFs disclose portfolio holdings and investment flows on a daily basis.

Changes in ETF indices are typically seen within those that track specialized strategies where underlying holdings ares frequently added or removed.

“This is more of a phenomenon not just for indexing, but for complex indexing where there’s a high turnover,” Elisabeth Kashner, director of ETF research at FactSet, told the WSJ.

In QUAL’s case, the ETF’s underlying index picks stocks based on a specific factor or quality, targeting companies that have stable earnings and lower debt levels.

Other fund’s in BlackRock’s iShares smart beta suite also saw outsized money moves in response to portfolio rebalancing. About $230 million was swapped around through the iShares ETF that tries to pick undervalued stocks, and over $800 million was shifted through an iShares ETF that invests in stocks that are less vulnerable to market turbulence.

For more information on ETFs, visit our indexing category.

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