Why ETFs can’t be blamed for the correction or volatility in stocks

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Why ETFs can’t be blamed for the correction or volatility in stocks

MarketWatch

Four of the five most active securities this week were ETFs

The U.S. stock market suffered its worst week in months this week, with major indexes dropping into correction territory for the first time in about two years. Was the phenomenal popularity of exchange-traded funds a contributing factor to the weakness or the scale of the decline?

This is a question that has been hotly debated for months, particularly as ETFs continue to be among the most widely used securities on Wall Street. While ETF advocates argue that the funds simply track the market, as opposed to leading it, skeptics have long warned that the concentration of assets within ETFs would exacerbate market moves and lead to indiscriminate selling in the event of a downturn.

Read more: Fears grow that popularity of ETFs is a ticking time bomb

Equity ETFs track baskets of securities like mutual funds, but trade intraday like stocks. The investment vehicle is dominated by passive products, which simply mimic the performance of an underlying index like the S&P 500 SPX, +1.49% holding the same stocks the index does, and in the same proportions. Currently, 6.97% of the U.S. stock market is held by ETFs, according to data from Toroso Investments.

“The numbers simply don’t support the idea that the rise in ETF ownership is creating a world where everything is correlated,” said Michael Venuto, co-founder of Toroso Investments. “Remember that ETFs were a fraction of their current size in 2008 [during the financial crisis], but you had the same kind…Read More

Lakeem Khodra
Lakeem Khodra
News Writer/Contributor at Tyranny News @lakeemk

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