Price Discovery
Regardless, SocGen’s critique is a familiar one on Wall Street.
The theory goes that in a tumbling market, secondary liquidity in the ETF would likely evaporate, forcing traders to shift to the primary venue, with the liquidity of assets underlying the passive instrument subject to increased selling pressure.
Gold miners stocks held by popular securities from the likes of VanEck are at risk, thanks to large ownership by these funds, according to SocGen strategists.
Weighting dynamics also increase crowding risks in dividend equities, with a clutch of gauges boosting exposures to shares with modest market capitalizations given their high yields. That, in turn, has led to heavy holdings by ETFs of stocks like Tanger Factory Outlet Centers Inc. and Meredith Corp.
That’s not to say ETF providers aren’t aware of the issue. The VanEck Vectors Junior Gold Miners ETF, for one, changed its index last year after ownership stakes in some companies rose above 10 percent.
And there’s good news from the French bank. Around 90 percent of world equities likely aren’t subject to heightened risk of a liquidity squeeze because they’re owned 10 percent or less by ETFs, it says.
Even in fragile emerging markets -- an asset class riddled with hot money -- passive funds appear to have passed this year’s stress test.
BlackRock points to action last month in its iShares MSCI Turkey ETF, ticker TUR, when the country’s assets were roiled by increasing tensions with the U.S. The ETF’s underlying index plummeted 16 percent on Aug. 10, but trading in the fund remained orderly, with no discernible impact on the underlying shares.
“TUR saw its highest amount of daily trading volume ever, with 13.3 million shares exchanging hands that day, compared to its previous average daily volume of 500K shares,” according to the statement.