The risks of large ETF ownership

Potential liquidity issues can occur

Sebastien Lemaire

The ETF market has grown rapidly over the last 10 years and was worth an estimated $9.2trn invested assets at the end of December 2022. Not only has the market expanded dramatically but it has also diversified away from traditional, broad, free-float market-cap weighted indices to encompass targeted exposures to a variety of market factors and themes through bespoke underlying indices.

These indices typically aim to maximise exposure to the underlying investment themes while avoiding concentration and liquidity deterioration. Even though most indices apply constituent investibility criteria, the equilibrium between purity and liquidity is sometimes difficult to maintain.

Large inflows into ETFs may lead some underlying index constituents to become materially owned by those ETFs, potentially exposing investors to significant losses in the event of large ETF redemptions and/or sales of the deleted constituents on index reconstitution dates...

Sébastien Lemaire is head of ETF research at Société Générale

This article was first published in Thematics Unlocked: Looking Under The Bonnet, an ETF Stream report. To read the full article, click here.

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