Industry Updates

Why shareholder activists dislike ETFs

David Tuckwell

Three ETF stories and ideas from around the web that have made the last week interesting.

1) Why do activist investors dislike ETFs?

Activist investors say they dislike ETFs because they promote cross-ownership. Thus if money pours into a sector ETF like entertainment it will invest in both Disney and Time Warner, which are meant to be competitors. This means that passive fund managers, like

BlackRock and State Street, become cross-owners, owning companies that are meant to be competitors

. This cross-ownership, activists claim, is anti-competitive, because cross owners do not care which company wins as they have money on every horse. Activists point to research on cross-ownership in banking and airlines that finds a correlation between rising prices and rising cross-ownership.

But there might be other reasons activists dislike ETFs. Activists like pushing for change, sometimes pushing for changes that are not in the long-term interests of companies. But ETFs, which promote long-term ownership and do not relinquish their stakes to activists, can get in their way. This might be another reason activists dislike ETFs: they can act as an obstacle to their push to buy out and control companies.

2) El-Erian: Passive investing fits with the times

Cost and performance are the big reasons ETFs are so popular. But they aren't the only reasons. Another reason is they fit the current investment climate, where investors want to tap into the historic bull run while having plenty of liquidity if it ends. (SPY's current spread is 0.00%, while yearly performance is 18%). This strategy has obvious benefits but a danger stalks: not everyone can do it at once. That is,

if everyone sells their ETFs at once, the liquidity goes

. Caveat emptor.

3) BoJ's ETF binge to unwind

Bank of Japan has become one of the world's largest ETF investors, which has helped boost Japanese stocke prices.

But the bank won't continue doing this much longer

. BoJ officials have indicated that the ETF binge will slow in 2018.


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