Money moving into and out of ETFs can affect stock prices, but probably not to a dangerous degree
In the weeks following February’s largely unanticipated stock-market plunge, post-mortem analyses emerged to suggest that it was made worse by investors yanking money from passive funds. It seemed to confirm one long-held fear among ETF critics: have the funds gotten so big that they can exert an outsized influence on the markets?
But a new report from S&P Global Market Intelligence says that conclusion is overblown, reported the Wall Street Journal. According to Daniel Sandberg, a director at the firm, as much as one-third of the S&P 500’s almost 3.8% decline on Feb. 8 could be attributed to strategies that mimic the benchmark.
Data from Morningstar shows that assets in passive funds, including ETFs and mutual funds that try to match the market, have quintupled to US$6.9 trillion in the past ten years.
The ETF industry, with the US space currently at US$3.6 trillion in AUM, has been of particular concern. Unusual price swings in oil, Japanese stocks, and high-yield debt have been connected to ETFs; a spike in volatility futures contracts in February was blamed on ETFs that bet against the Cboe VIX.
“Clients are asking, ‘How big do ETFs have to get before we get concerned?’” David Pope, a managing director at S&P Global Market Intelligence, told the Journal.
That questioning spurred Sandberg and his colleagues to attempt to quantify the impact of money flows into and out of passive strategies, with particular attention paid to ETFs. They found some stocks to be more sensitive to price moves driven by investor cash flows.
The impact doesn’t just depend on the stock’s weighting within the S&P 500 index, however. The report noted that ETFs affect prices when they attempt to buy more shares of a stock than there are in the market, or when they try to sell more than there’s demand for. In other words, it’s more dependent on a stock’s availability, which the report says has little to do with its market value.
According to the report, the impact ETFs had on prices was “modest” and tended to dissipate within several days.
“There’s not much cause for concern for systemic risk, but we have been able to quantify that there’s some minimal impact,” Sandberg said.
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