According to TradersMag, during Q1 2012, ETF volume as a percentage of total volume reported by major exchange fell to 16 percent from 19 percent (for all of 2011) because correlations between individual stocks and ETFs has declined. Once again, it appears to be a stock-picker’s market.
The same column in TM referenced a Credit Suisse reoprt that found that average correlation across the S&P 500 went as low as 13 percent in February. (It has since bounced back to around 40 percent.) In 2011, by contrast, correlation surpassed 80 percent in the fall and ended the year at 77 percent for December.
According to Credit Suisse analyst Ana Avramovic, ““If correlation is high, then macro fears tend to dominate, and ETFs are a great way to implement macro ideas since they give you exposure to an entire sector or theme with a single product. Naturally, as correlations come down, it makes sense that ETF activity would also come down.”
Industry sources suggest that while volumes in plain vanilla ETFs–those comprised of single-name stocks- may be declining, there has been an increased use of leveraged ETFs, and ETFs tied to commodities. One trader says, “We have so many more sector products that are out there, and so many different ETFs that are coming out that drill down to minutiae so you can get very specialized exposure. “People are going to use that instead of going in to buy a single stock.”
Now, let’s turn the page back a few weeks to the post that identified the ETFs with largest AAPL weightings. Now let’s look at the overall market averages vs. those ETFs and vs. AAPL. No surprises, right?