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Getting real about ETFs and the markets

Samara Cohen tells the real story about the impact of ETFs on capital markets.

Three market myths, debunked

Millions of investors use exchange traded funds (ETFs) to take greater control of their financial health and well-being. ETFs empower investors by providing access to almost any market imaginable to build for the outcomes they want — conveniently and at low cost. The rapid growth of ETFs in recent years has given rise to misperceptions about how they operate in the marketplace. Samara Cohen tells the real story about the impact of ETFs on capital markets:

1. ETFs aren’t taking over the market.

It’s true that ETFs have grown, but they still represent a drop in the bucket of overall market assets. U.S. stock ETFs accounted for just 8.5% of the total market as of the end of June 2018, according to data from SIFMA, Bloomberg and BlackRock. In other words, more than 90% of the U.S. equity market is made up of individual stocks, mutual funds and non-ETF investment vehicles.

The ETF imprint on bond markets is even smaller, accounting for 1.4% of the total U.S. bond market.

ETFs are still a small portion of stock and bond markets

Equity AUM ($T)


Equity AUM ($T)

Fixed income AUM ($T)


Fixed income AUM ($T)

Equity AUM ($T)


Equity AUM ($T)

Fixed income AUM ($T)


Fixed income AUM ($T)

Source: SIFMA, Bloomberg, BlackRock as of 6/30/2018

2. ETFs don’t drive the direction of stock or bond markets.

The size of some broad market ETFs (such as those tracking the S&P 500) can make it seem as though the funds themselves drive stock or bond prices higher and lower. In fact, it’s the other way around, for two reasons:

  • ETFs don’t actually own the assets they manage; investors do, typically tens of thousands of individuals and institutions in each fund. Each one of these investors represents a decision of how to invest his or her capital, based on personal factors such as risk tolerance, investment goals and market views.
  • ETFs are just one lever that investors can pull to buy or sell a stock or bond. They can also use single securities, actively managed funds and futures. ETFs are popular because they’re a cost-effective, transparent way to gain exposures. But if there were no ETFs, investors would just use different vehicles (and many do).

3. ETFs don’t make markets more vulnerable to shocks and bouts of volatility.

ETFs have repeatedly proven themselves to be “shock absorbers” in stressed markets. Investors turn to ETFs for real-time pricing in times of uncertainty, including during the high-yield bond selloff of 2015, or in February 2018. Increased demand is reflected in increased trading volumes because buyers and sellers use ETFs to rapidly transfer risk.

U.S. listed ETF trading volume ($B)

U.S.listed ETF trading volume ($B)

Source: Bloomberg

The fact is that ETFs have been good for markets and are useful to investors. That’s why millions of people use ETFs to seek greater control over their financial health and well-being.