Report finds ETF impact on asset allocations, stock prices

The products are having an outsized effect on the broader equity markets

Report finds ETF impact on asset allocations, stock prices

ETFs reportedly count for less than a tenth of the assets in the US stock market, but a new report finds they are becoming increasingly influential in the way stocks are priced and assets are allocated.

“Instead of picking an active fund manager, investors … now choose what we will call ‘attributes,’” explained Nicholas Colas, co-founder of US-based DataTrek Research, in his latest market report. As reported by ThinkAdvisor, Colas believes the shift in focus to attributes such as geographic concentration, market cap, growth/value, and sectors “represents a fundamental change in how capital allocation works in US public markets.”

Colas looked at two stocks in which ETFs held 6% of their outstanding shares: Apple and JPMorgan. The two stocks have performed very differently, with Apple shares having gone up by around 10% year-to-date, while JPMorgan has inched up 0.5%.

He compared the ETFs that had the largest allocations of each, including fourteen that owned both, six that had Apple, and another six that owned JPMorgan.

Among the six ETFs that owned Apple, three were growth index funds, two were tech funds, and one was a low price-volatility fund. The six that owned JPMorgan included three value index funds, a financial-sector fund, a price-momentum fund, and a dividend yield-oriented fund.

Flows into tech-sector ETFs have exceeded those into financial-sector ETFs by 30% so far this year; equity growth ETFs, meanwhile, have had inflows nine times the size of those into value ETFs.

“No one factor defines stock prices,” Colas said. “Our point, rather, is that as ETFs have multiplied they have created a stock market where investment attributes (sector, growth/value, etc.) play a growing role in setting marginal prices.”