Here’s a wake-up call to critics of the ETF world: two more unrelated and just-published research studies have acquitted the ETF industry of charges leveled by critics who have claimed ETFs are at the root of heightened market volatility.
In a newly-released report from the Investment Company Institute, which interrogated market volatility over the past 25 years, ICI’s experts (let’s presume their unbiased, OK?) concluded that ETFs have unfairly been cast as the dog wagging the tail, and accusations that “ETFs were the ‘match that ignited the Flash [Crash]’, or have in any other way been responsible for any unusual market volatility, are simply inaccurate and unjustified.
According to the report, “Heightened periods of volatility existed before ETFs (the most volatile during Black Monday ’87)”…more importantly, “The market volatility that started before the financial crisis in mid-2007 and has continued through today has [simply] coincided with the rapid growth of the ETF market, as assets have grown from about $600 billion to more than $1 trillion.” The report points out that “over the same time period, there was a prolonged global financial crisis that threatened to take down the international banking system and threw financial markets worldwide into turmoil.”
This report comes on the heels of a joint report issued by the SEC and the CFTC which determined that ETFs were not the cause of the May 2010 “Flash Crash”. (Even if Editors here reserve comment on any potential conflicts these agencies might have), ICI’s report coincides with an earlier report study from Morningstar Inc., which investigated and dismissed the notion that leveraged ETFs were causing increased turbulence late last year. The Morningstar report also pointed out that if leveraged ETFs were the cause of market volatility, the assets in the funds would rise and fall with volatility, but assets remained mostly steady from March 2009 to November 2011.