By Jim McConville
Investor concerns that end-of-day trading of exchange-traded funds are aiding and abetting market volatility are unfounded, said panelists at a webinar hosted earlier this month by IndexUniverse.com, a publication that covers the ETF industry.
"These (ETF) products, in total, have about $36 billion in them,'' David Nadig, research director for IndexUniverse.com, said during the "Special Risks in ETFs: Addressing Myths and Uncovering Real Concerns" webinar. "That may seem like a lot of money to you and me, but in the grand scheme of the $56 trillion global equity market, $36 billion is kind of nothing.
"Everyone always wants to point a finger,'' he added. "But we just did a big study on inverse and leverage trading at the end of the day, and we found pretty conclusively that there's no way to say this end-of-day trading is driving the market one way or another.''
IndexUniverse.com ETF analyst Paul Britt also dismissed growing industry criticism that ETFs exercise an inordinately strong negative impact on overall daily market pricing. "Daily ETF trading activity is a modest footprint of the overall market,'' he said. "The ETFs are a subset of a larger industry impact.''
He noted that total industry activity of one day of trading of the S&P tracking index was $11 trillion versus an estimated $126 billion by ETFs, or 1.1% of the total trading pot on the index.
Britt says that major market events in the past year, including the Japanese tsunami, European debt crisis and downgrade of U.S. treasuries, have each had more negative impact on the capital markets than ETF trading activity.
Matt Hougan, president of ETF Analytics and global head of editorial of IndexUniverse.com, said that ETFs' current bad boy reputation has been spawned by four factors: Adverse market trends; critical industry reports; unfavorable press coverage and regulatory scrutiny.
"Investors are upset by the current bad market and are blaming ETFs for the rise in volatility,'' Hougan said.
Nadig said that instituting a regulation requiring retail investors to have special privilege to trade inverse and leveraged ETFs might be an idea worth exploring.
"I think it's rational to talk about whether or not there should be the same kinds of protections in place where investors, for instance, can't open a margin account without having some kind of additional disclosure,'' Nadig said. "But some of this discussion about [leveraged ETFs] somehow endangering the global financial system is a little overblown.''