An ETF is an investment instrument that tracks a specific index – the Dax, for example. quirion, for instance, invests its clients’ assets exclusively in ETFs and index-based funds, thereby following the latest findings of financial science. Studies show that over the long term no investor or fund manager can beat the global markets through active, forecast-driven investing.
One of these active fund managers is Fraser-Jenkins of the US investment house Bernstein. The backdrop to his criticism is the growing share of ETF-based investments around the world. This, he argues, poses a serious danger to society. “A supposedly capitalist economy in which investment is exclusively passive is worse than a planned economy or an economy with an actively managed capital market,” says Fraser-Jenkins. The task of the markets, however, is to supply good companies with capital and to punish bad ones. Investing in ETFs, by contrast, funnels money to all companies equally. Fraser-Jenkins speaks of a “dictatorship of indifference.” The other concern: if ETFs are sold on a large scale, capital is pulled out of the markets, increasing the risk of a crash.
Is this just someone out to provoke? Or is there actually something to the claim that Fraser-Jenkins and his team put forward in their study?
Set against all funds, a more realistic picture emerges. The assets managed in ETFs are dwarfed by the total assets held in funds, which amount to around 30 trillion US dollars. That puts the ETF market share at roughly 11%. Despite its growth, then, the ETF market is still a lightweight. Not even Fraser-Jenkins can say at what share a critical tipping point would be reached. John Bogle, index-fund pioneer, founder of the investment company Vanguard and author of economics books, by contrast sees no elevated risk even at a market share of 90%. The market, he says, could handle it.
A closer look at the investor base does nothing to support Fraser-Jenkins’s thesis either. That’s because the largest ETF investors are typically institutional investors, such as insurers or pension funds. Long before ETFs came along, these investors were already highly index-oriented and relied on broad diversification to build wealth over the long term. “While decisions by these investors can accelerate or amplify movements in the markets, it makes no difference whether this happens through the sale of ETF units or, as in the past, through the direct sale of the shares held,” explains Kai Hattwich, portfolio manager and member of quirion’s investment committee. A crash or a crisis is driven by investors’ decisions, not by the instruments they use.
Investors’ decisions cause a crash, not the instruments.
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No critical tipping point in sight
It’s true that index funds mirror a market in its entirety. Every stock in such a fund is represented – or bought up – in proportion to how it is weighted in the market itself. It’s also true that the popularity of ETFs is growing. Critics like to reach for enormous-sounding absolute figures, such as the roughly 3.4 trillion US dollar volume of the global ETF market. But is that sum enough to justify fears of a crash?
