Sunday, April 19, 2015

ETFs May Be Moving Stocks in Unseen Ways

See also Izzy a year ago:
When ETFs make things more volatile
And a dozen others.

From Barron's ETF Focus:
A new study suggests that the funds may be herding equities together, especially in niche sectors like real estate and mining.

Are exchange-traded funds an unseen force, like gravity, that help determine stock-price moves? New research suggests that the rise of ETFs may be complicating stock pickers’ chances of selecting winners or losers. That could make it even harder for stock-fund managers to outperform their benchmarks as assets in ETFs grow.

The $1.2 trillion in U.S. stock ETFs is having a much larger impact on the market than the fund industry claims, according to a recent report from Goldman Sachs. At issue: Heavy trading of index-tracking ETFs appears to be herding individual stocks up or down together, particularly in niche industries such as real estate and mining.

Goldman’s equity research team contends that increases in ETF trading appear to be tightening correlations, or the tendency for individual stocks and sectors to move up or down in lock step, regardless of a company’s fundamentals.

ETF trading has grown to account for about one-quarter of overall share turnover, according to Goldman. That’s up from 10% to 15% in 2004. 

MOST ETF TRADES don’t affect the underlying stock market at all. The majority take place between buyers and sellers, just like stocks. But ETFs require a separate layer of traders—at the institutional level—whose function is to keep ETF prices in line with the value of their stock baskets. These specialized market makers, called authorized participants, regulate the number of outstanding ETF shares based on supply and demand.

In some cases, this act of creating or redeeming ETF shares can carry sway over price moves in certain stocks, say Goldman’s Katherine Fogertey and Robert D. Boroujerdi, the report’s authors. Put another way, ETFs can be the tail that wags the dog....MORE