Despite various “panicked claims” about the effect of ETFs and index funds on capital markets, the scale of passive investment is still relatively small, says BlackRock.
BlackRock, which has US$3.9 trillion in passive assets under management, has sought to calm investor fears about the rise of indexing and, specifically, ETFs.
In a note titled It's time to elevate the indexing debate, BlackRock vice chairman Barbara Novick said the "dramatic" growth of index funds has "generated skepticism among some and outright hostility from others".
"Some detractors have gone so far as to compare passive investing (unfavorably) to Marxism, and as a hindrance to efficient capital allocation and securities pricing," Ms Novick said.
The most common misconception, she said, is about the size of indexing relative to the overall market given the "panicked claims some have made suggesting they now dominate global markets".
"The scale of index investing is still small. While critics prefer to throw around the biggest number possible – 40 per cent of US mutual fund assets under management are indexed – indexed investing measured broadly represents less than 20 per cent of all global equities," Ms Novick said.
"Index funds and ETFs account for just over 12 per cent of US and 7 per cent of global equities. Ultimately, there is plenty of room for everyone."
Ms Novick also addressed concerns that index funds have an "outsized and detrimental influence on price discovery".
"In fact, the price discovery process is dominated by active stock selectors. We estimate that for every $1 of US equity trades driven by index strategies, there are $22 of trades driven by a variety of active strategies," she said.
"The difference reflects both the relative size of these funds and the vastly lower turnover of index strategies."
Finally, the greater correlation among stock returns is down to global monetary policy, not indexing, Ms Novick said.
"Are index funds and ETFs disruptive? Yes, in the sense that any new technology shakes up the status quo," she said.
"But there’s a difference between disruptions to the asset management industry and disruptions to the functioning of capital markets. Price discovery and asset allocation mechanisms continue to take place efficiently and continuously."
A new survey has found around 90 per cent of institutional investors believe pension funds, insurers, family offices and sovereign wealth fu...