There has been a fair amount of sensationalism and disproportionate criticism around the impact of exchange traded funds (ETFs) and passive investing on the stock market and market efficiency, according to VanEck.
Managing director, Arian Neiron said if one took the US as an example, there was stark evidence that where the active industry had lost money, the ETF and exchange traded product (ETP) industry had gained money across a range of strategies.
“We would say that it’s very much the proponents of those who have been most vocal about it are the ones who are losing the most currently,” Neiron said.
“Our view is the motivations are very simple. If you look at particularly in the US where it’s highly amplified, the net inflows into the ETP industry versus the active, unlisted mutual funds is like a jaw.
“So it looks like one inverse correlation between each other. This is normalisation of the market and the truth is, yes, there may be a market cap for instance.’
Neiron added institutions had been tracking passive indices for decades, including large sovereign wealth funds and superannuation funds, who had many passive mandates.
“From our end, if you had an extreme event where passive was a disproportionate amount of markets, then there will be a greater opportunity for active managers to outperform. So you could really seize the opportunity. That’s not the case,” Neiron said.
While arguments have also been floated that the high levels of trading in passive funds had negative impacts on the pricing efficiency of the stock market, Neiron said this had not been a bi-product of ETFs but rather a technology shift in trading and market participants.
“There were dark pools before ETFs proliferated to where they’re at and their dark pools were effectively criticised pre-GFC for creating distortions in markets. So there are a number of variables including market structure,” he said.
“Is it a changing of the guard? No. Naturally you would expect those who are losing flows to find a scapegoat as to why their business model may not be primed for a new market environment in financial services.”
VanEck’s Vectors FTSE Global Infrustructure ETF had returns of 18.01 per cent over the past 12 months, ahead of the 17.12 per cent returns of the AMI Equity Infrustructure TR benchmark, according to FE Analytics.
