Are Exchange-Traded Fund flows creating the mother of all opportunities?

A common excuse given by fee-charging active fund managers that have battled to beat their benchmarks has been the ever-rising popularity of exchange-traded funds.

ETFs effectively allow investors to track an index – anything from the S&P 500 to obesity-related stocks – by simply buying a listed security tacking the index or a basket of stocks.

The global market has grown from 580 products totalling $US728 billion of assets to more than 5000 funds with more than $US5.6 trillion of assets.

But some have argued that this created multibillion-dollar flows of brainless money simply buying and selling stocks based on predetermined rules rather than any thoughtful analysis.

This, it has been argued, has made stock markets less efficient, fuelling bubbles and creating the mother of all opportunities for savvy stock pickers.

But if the findings of a group of academics are to be believed that’s simply not true.

In fact, the opposite may be occurring. Exchange-traded funds may have actually made markets more efficient and made markets more active than passive.

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Source: Are Exchange-Traded Fund flows creating the mother of all opportunities? | afr.com