ETFs & the Danger of Hyper ETF Concentration

Posted in In the News, Market, Investments, Stocks, Bonds

Exchange Traded Funds (ETFs) popularity has surged in recent years.  Inexpensive fees and a wide range of investment options … what’s not to like?  Unfortunately, as with most things, when it’s too good to be true it usually is. Typically, ETFs are legally restricted from investing above specific ownership thresholds in a stock. The ETF universe is large and growing.  Unfortunately, a single ETF frequently has overlapping ownership positions vis-a-vis other ETFs.  Consequently, ETFs now represent a substantial combined ownership position in most large capitalization companies.  Mutual funds and large (institutional) pension funds also hold many of these same companies in their portfolios.

Should a market correction happen, ETFs and institutional funds (which typically track the index) will aggressively sell shares. More supply drives share prices lower. When the ETF universe sells en masse, prices can fall dramatically for individual securities and for an entire index. The 2008 Global Financial Crisis and the 2010 NYSE Flash Crash are two examples of the risks of hyper concentrated ownership.

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