The Blame Game

The Federal Reserve, quantitative easing, FAANG, margin debt, index funds, buybacks, low interest rates, CAPE ratio, and now ETFs. Exchange traded funds have found a home in the charlatan’s tool kit.

Eric Balchunas says, “Blaming ETFs for the rise of the stock market is like blaming MP3s for the rise of Nickelback.” There is a lot of debate and misinformation as to what ETFs are doing to the market and how big they actually are. According to Eric Balchunas:

Only half of the $27 trillion U.S. stock market is owned by funds. The other half is owned by individuals, institutions, and officers of the companies. So of the half that’s owned by funds, passive is roughly 35% of that half and, therefore, 16% to 17% of the whole equity pie. ETFs then own a little less than half of that, or 7.4% of the sock market. The fraction of stock ownership isn’t a threat to the capital markets.

Okay so ETFs are still relatively small, but can they kill price discovery at a certain point? (I realize I’m using ETFs and index funds interchangeably and that they are not the same thing) The chart below shows that the explosive growth in index funds has not distorted the market. 

Three years ago, General Electric was the 5th biggest stock in the S&P 500. And over this time, the three biggest S&P 500 ETFs (IVV, VOO, SPY), have taken in $120 billion in assets. So how much is General Electric up overt this time? -47%, making it the 40th largest company in the index.

It’s pretty incredible that for years, the same people have been “blaming” the rise on the stock market on the Fed and FAANG and margin debt and now ETFs. As  if 91 consecutive months of jobs growth and record revenue, profit margins and earnings can’t be the driving factor.

It’s a good thing we have people like Eric Balchunas who can expose the fallacies we hear every day about ETFs and what they’re doing to the market


Balchunas: The case for ETFs