The unforeseen consequences of alternative equity index ETFs
3/1/2019
The popularity of alternative approaches to passive index investing through exchange-traded funds (ETFs) has grown rapidly over recent years, overtaking traditional capitalization weighted strategies. Although the share of US equity securities held by alternative equity index ETFs is only 7%, they account for two-thirds of total ETF assets. This is raising concerns that passive trading is having an impact on market behavior. We analyze the evidence for these concerns and argue that if the tide of money suddenly reverses, this could worsen a market drawdown.
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