ETF’s: A Fly or a Bull?

The goal of trading models is to be a fly on the bull’s back, but not be the bull. ETF’s have long sold themselves as that fly – now giving investors a way to follow along with almost anything you can think of (with ETF’s for (SPY) SPDR S&P 500, (GLD) Gold, and (IYR) iShares Real Estate. ) But what happens when the fly starts to move the bull, instead of the other way around…  Enter pricing problems, enter volume during volatility.

Chart Courtesy: The Reformed Broker

iShares Blog seemed to run away with themselves over the increased ETF trading…

“This is a trend we’ve seen before. When headline-making news triggers a sudden shift in investor sentiment and market volatility jumps, it has been followed by elevated ETF trading volumes in absolute dollar terms and also in proportion to total US equity market trading volumes. In June, ETFs accounted for 31% of the dollar value of all trading volume in US equity markets, up from 20-25% in recent months.”

However, these numbers may be a bit deceiving. For instance, while Bond ETF’s now represent 17% of all ETF’s, a 12% increase in 7 years, Yahoo Finance points they still only account for .03% of the total bond market (chart below).

Chart Courtesy: Yahoo Finance

So while ETF trading volume is surely on the increase, and there have been some issues in real time pricing – the fly leading the bull comparison may not be entirely valid.

A related but different concern was rampant not so long ago – in terms of commodity ETF’s and their affect on the food supply. The logic was that billions of dollars going into a commodity tracking investment might cause the commodity itself to move – going from tracking to causing – and that has mostly been debunked (although a Congressman did just ask CME’s Terry Duffy about it last week.

The one people haven’t figured out (or started complaining about) yet, is the REITs, REIT ETFs, and all the real estate products. Isn’t demand for those products pumping money into commercial real estate and driving up rent costs… After food, that seems like something the “speculators are evil” camp would be concerned about. And seeing as how it doesn’t involve futures markets, we would be happy to shift the target over to the real estate folks.

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