Remarkably, Exchange-Traded Funds have grown from $0 to $1 trillion in just 20 years. As they are still a relatively new and rapidly growing asset class, it is time to consider how they might contribute to the instability of financial markets.
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Good article, but I blame the internet. ETFs are uber-liquid, and massive amounts of retail and pro money are combined into the same products. On top of that, people all over that spectrum are making group-think investment decisions over twitter and other social media platforms – including old people fucking around with their own money. Some of it gives people a real edge (PPT/12631), but most of it is shit advice.
I have got to think that markets have been increasingly volatile since the advent and proliferation of the internet. The combination of cheap, fast, and liquid trading means that a greater number of unqualified investors, be it snake charmers or baby boomers, are moving large amounts of money with emotion instead of discipline, using the convenience of group-think instead of conducting personal discipline and due diligence. These are people with no real system, which translates to little conviction, which then brings you to hoards of weak hands moving loads of money with great liquidity and low trading costs.
In particular, old people being able to trade based on an instantaneously broadcast stream of mostly garbage is just fucking dangerous. “Sorry grandkids, I thought GMCR was the bees knees at $68 because I followed a smart fellah on twitter. Guess he didn’t have access to Einhorn’s research report like Larry at the coffee shop. He uses a site called imakecoin or something, but you know my hearing ain’t so good anymore”
I tend to agree, but with trading volume decreasing, perhaps there is something else?
I guess my thoughts are focused more on the composition of the trading community which comprises that volume (be it high or low). There are x% more poorly-qualified, weak handed individuals controlling money now vs. a decade ago. That condition, combined with the ETF as a cheap and convenient trading vehicle, is what makes ETFs more volatile. As a converse hypothetical, if access to ETFs was restricted to accredited investors & money managers, my bet is that they would be less volatile as a product. I think it’s also important to acknowledge counterparty risk and computer glitches, since failures of either can easily spook investors into a selling panic – adding yet more volatility.