As the amount of funds invested through exchange-traded funds and other passive index vehicles stands at $ 8 billion globally (June 2 report), central banks are overlooking some key risks that could put pressure on the market. global financial systems.

First, the growing concentration among the major ETF providers comes with idiosyncratic risks, so that if any of the top three players run into trouble, whether through cyber attacks or other black swan events, the withdrawals could put pressure on the entire market.

Meanwhile, low-fee funds (sometimes zero-fee funds), required economies of scale, and well-established distribution relationships make it unlikely that new entrants will successfully enter the market and diversify. organically the risk.

Second, ETFs increase the risk of more acute market volatility. Although leveraged ETFs currently make up a modest percentage of passive strategies, they are readily available to uninformed investors and amplify day-to-day returns without considering specific company performance. Their consequences are increasing as ETFs represent a larger and larger share of trading volumes.

Consider the impact of index additions. As The Joint Corp’s market capitalization approached $ 1 billion, it replaced Cubic Industrials in the S&P SmallCap 600 Index. With a negligible fundamental change in its business,

the addition to the index pushed the stock up 17%. Artificially inflated valuations, ultimately, invite a correction.

Phil naylor
Cambridge, Cambridgeshire, United Kingdom


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