Last week, Goldman Sachs* published a report titled “ETFs: The Rise of the Machines”, which discusses the influence and impact ETFs have on specific stocks’ trading. Two years ago, Ipreo published a primer on the same topic in our BetterIR newsletter.
Goldman’s research has some interesting implications for issuers, particularly those in industries with very large sector ETF’s (such as Energy and REITs). Ipreo’s primer on how ETF trading works, and how it impacts issuers, is below.
From April 2013’s BetterIR – ETF Primer
In no uncertain terms, ETFs are a disruptive product to the asset management universe. Strategies that in the past could only be pursued through high-fee structures such as hedge funds can now be accessed by even the smallest of retail customers, taking away many of the built-in advantages afforded to active managers in the past. Walk into any investment committee meeting of an active manager and ask what the investment firm’s biggest concern is – the elephant in the room is the risk posed by the democratization of passive management.
Rarely is the impact of the expansion of the ETF structure on the equity issuer community ever deconstructed. In some ways, the issuer directly benefits from the increased liquidity available to major investors – but the benefits may be offset in the long run by concerns about the impact of increased concentration of ownership within a small set of managers.
For the full feature from the BetterIR, click here.
*Disclosure: Goldman Sachs Merchant Banking Division is one of Ipreo’s owners.