QUICK TAKE: ETFs Exacerbate Market Volatility

Trader's Magazine posted THIS article yesterday, April 1, 2020 by John D'Antona Jr.

Stock gyrations might not be the only thing pushing equity prices around.

ETFs – exchange-traded funds – which are baskets of individual stocks that are traded are tossing prices around and exacerbating volatility like a ship on the water during a hurricane.

In a brief conversation with Traders Magazine, Gerry Frigon, President and Chief Investment Officer at Taylor Frigon Capital Management said that ETFs are contributing to market volatility.

“If anyone really enjoys the kind of wild swings in individual stocks that make no fundamental sense, then they should just keep proliferating the “derivative” phenomenon of passive vehicles like ETFs and the algorithmic trading (algos) that are creating and profiting from such activity,”Frigon began. “All of those who say “I just use index funds” have no idea what they are investing in from a business standpoint. They are essentially allowing black-box models to deploy their investment dollars which are at the center of the problem with the market mechanism and these investors are actually contributing to the crazy volatility we are seeing, and have been seeing for some time now.”

Say it isn’t so, Gerry.

Yep, it is. Frigon pointed out that it was one thing when so-called “indexing” was a tiny fraction of the market, but now that almost 35% of invested funds are indexed, it’s an entirely different situation. When one couples that massive increase with the regulations spanning the past twenty years that essentially made it unprofitable for brokerage firms to make markets in OTC stocks (those are the small/mid-sized companies), and you have an illiquid market, subject to the whims of the computers.

And thus the wild daily or intra-daily price movements in ETF prices or their underlyings. As of this writing (April 1, 10:35 am EST) the DJIA was down 575 points at 21,341, just one hour after the open that saw the market down close to 1,000 points.

“After 35 years of watching our industry abdicate responsibility for making real investment decisions and come up with “products” that have nothing to do with financing real businesses, frankly, we have no problem saying what we see going on,’ he said. The same cannot be said for ETF issuers and their sponsors, he added.

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