BlackRock Hits Back At SocGen Alarm Over ETF Market Fragility

Alarm bells over the perils of the ETF investing boom are ringing anew, with Societe Generale SA the latest to warn on brewing liquidity risks -- provoking a rebuke from the world’s largest asset manager.

After stress-testing the fragility of 16,000 stocks, the French bank concludes small caps, dividend shares and gold miners are all acutely vulnerable in market downdrafts thanks to outsized ownership among passive investors.

In turn, those positions could prove more costly to exit. Given the Bank of Japan’s massive purchases, the Nikkei 225 Index is also, in theory, particularly fragile.

“Crowdedness exists but is limited to a few stocks and strategies,” SocGen analysts led by Sebastien Lemaire wrote in a report last week.

The conclusion provides some ammo for regulators and ETF detractors on Wall Street, who charge the post-crisis flood of passive money has marshalled an investing-herd mentality, dubbed crowding risk.

Small caps could be whipsawed by this dynamic since the same stocks in the sector make an appearance in multiple indexes tracked by ETFs, according to the report.

The world’s largest issuer of passive products, BlackRock Inc., dismisses the warnings.

“This research is underpinned by two assumptions that don’t reflect the historic behavior of investors or ETFs,” the firm said in an emailed statement.

“To assume that all investors behave the same way in times of market stress is not grounded in reality. Additionally, we have repeatedly seen ETF volumes grow dramatically during times of stress as investors utilize them as a tool for price discovery.”