It may sound paradoxical, but there is in the Economics, too Much of a Good thing. The best example of this paradox is: If individual households to save, which is good for their wallet. All, save the economy collapses, and nobody is helped.
This Much-the-Good-the Paradox could strike now in the financial markets. The index funds, Exchange Traded Funds (ETFs), their triumphant celebrations. It is a revolutionary product that allows savers with little money cost-effective in a globally diversified Portfolio. Just in private asset accumulation, such as for retirement, develop ETFs for your blessing.
What is the individual investors rational, but it may be a Problem, if all the world is investing suddenly in the index Fund. Because the stock markets, there are buyers and sellers, actors with positive and negative opinions. ETFs that act “agnostic”: you have no opinion, but buy the values of an Index, if money flows in, and sell when investors withdraw the money. Increase market trends, especially when it comes to the stock markets down.
Before that, has now warned the Bundesbank in its latest monthly report. By the increasing spread of the ETFs is the risk that price developments would be reinforced in the financial markets. “The analysis of the Flash crash suggests that the potential for short-term gain from periods of pronounced tensions on the financial markets,” according to the experts. In clear text: The recent Mini-crash had been fueled by ETFs.
in fact, were exploded in the recent selloff on Wall Street the trading activities of the index funds really. The trading volume of the SPDR S&P 500, covering the common stock index and the S&P 500, was on 11. October to 275 million, five times the usual sales, high shot. The Index lost on this day temporarily almost three per cent in value.
“the trigger for the recent turmoil was of the ETF market,” says the Swiss dealer Hans Bon. The volume had exploded in the index Fund in the previous days in such a way that the powerful impression, the ETF operator would have the risks in the handle. The Problem is weighing all the more difficult, as with Blackrock, Vanguard and State Street, only three vendors dominate the majority of the market.
Bon is a supporter of index funds, called ingenious, and, in particular, to private investors, to the heart, which can save a fortune. But no one should overlook the downsides. “The financial world has once again created a Monster that can be tamed,” says market expert Bon.
there is No direct trade between the seller and the Investor
So far, the Bundesbank does not want to go. Although the importance of the investment vehicle, ETF’s have increased in recent years in the financial markets extremely. But the world’s outstanding assets of 5.1 trillion dollars is equivalent to just under 14 percent of all types of investment funds. Still classic investment funds would unite under the leadership of a Fund Manager with 29 billion, the Bulk of the funding.
In detail to the drawing, the Bundesbank’s experts of the rise of the ETFs, the United in 2009, with a volume of 0.7 trillion dollars, only 5.4 percent of the outstanding assets of all mutual funds.
A large part of the analysis of the functioning of the ETFs. In the case of index funds – unlike mutual funds – no direct trading between the Fund provider and the Investor.
This has consequences. In the classic investment Fund, the Fund Manager at least know their major investors. Someone wants to pull a larger sum, it signals this in time, and the investment Manager may try to create a market-friendly with the necessary liquidity. Different ETFs.
Here is a so-called authorized participants as Intermediaries between markets and ETF providers, while acting in. These market makers can also take advantage of the ETF shares or relevant securities, baskets on their own books, and act to some extent as a buffer. However, in turbulent times, nothing else remains all the between the dealers to sell shares to the vendor, who must then resolve the shares.
Possible regulation by auto-trading restrictions
In periods of pronounced market stress, could dry up the liquidity quickly, the Federal bankers. Then also, the Margins between buying and Selling prices of the index funds sharply expand. Problems showed, in particular, in the case of ETFs in less liquid markets, such as corporate bonds or emerging market equities.
In closeout phases could then drop the ETF price is below the index value, and who must sell, make an additional loss. This could increase the selling pressure, because everyone wanted to sell quickly before the value of the ETFs crashing.
in Detail, the bankers have moved, such as the ETFs in the past closeout phases, for example in the flash crash of may 2010 or in February 2018. At the time, the prices of individual ETFs deviated greatly from the already flatterigen Index.
The Federal bankers make at the end of the analysis for better regulation. Automatic trade restrictions could stop a sell-off in auto-pilot mode. A larger number of intermediate market makers could improve the liquidity situation.
The Swiss retailer Bon could imagine in the future, also larger pads for the ETF provider. You might be forced to risk capital, to take in periods of Stress temporary positions on its own books.
But that would run counter to the business model of the industry. It is striking that the share of the ETF giant Blackrock has recently fallen sharply from the High of around 30 percent has been lost, despite the fact that the Assets managed have risen in the third quarter to a record value of 6.44 trillion dollars. But maybe the Paradox is here, too, from too Much of a Good thing.