ETF Industry Growth Overtaking Stock Market?

The S&P 500 will soon be overtaken by its children, at least in terms of trading volume.  Bloomberg News tells us this in ETFs Poised To Exceed Trade in S&P 500 As Spiders Beat Apple.

Combined dollar volume in the SPDR S&P 500 ETF (NYSEARCA:SPY), iShares S&P 500 Index ETF (NYSEARCA:IVV), and the Vanguard Index Funds (NYSEARCA:VOO) S&P 500 ETF averaged $28 billion a day the past year.   This is only slightly less than trading in the index’s constituent stocks.

If current trends continue, S&P 500 ETFs will soon be more popular than S&P 500 stocks.  And these are only three of the 20 ETFs included in the Large Cap Blend category of the ETF Field Guide.  Add in the rest, and there’s a good chance ETF trading already surpasses that of the underlying stocks.

The motivation seems to be trading convenience.  The indexed ETFs are the easiest and quickest way to get broad market exposure.  If no such vehicles existed, the goal could be achieved only with baskets of individual stocks.  That method is far more expensive and requires far more capital, so smaller institutions and individual investors would be left out – as they were prior to S&P 500 funds.

To look at it another way: if all other factors could be held constant, S&P 500 stocks like Apple Inc. (NASDAQ:AAPL) and Exxon Mobil Corporation (NYSE:XOM) would need an additional $28 billion in daily trading value to overcome the absence of ETFs.  Clearly, ETFs matter to the markets.

ETF convenience also has a dark side.  High frequency algorithmic trading systems occasionally run wild, with the recent incident at Knight Trading only the most recent example.  Such trading was not necessarily enabled by ETFs, but is certainly related.

The growth trend for ETF shows no sign of slowing, and its impact on market functioning continues to evolve.  Even stock investors who never use ETFs need to keep their eyes open.

Disclosure covering writer, editor, and publisher:  Long AAPL.  No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

This article was originally written by Patrick Watson, and posted on Invest With An Edge.