Passive investing via ETFs is not driving market performance or distorting prices however, investors still need to monitor stocks that have high ETF ownership, according to analysts at Citigroup.

Assessing the impact of ETF ownership on stocks in a report seen by ETF Stream, the analysts found S&P 500 stocks with high ETF ownership – as a percentage of float-adjusted market cap – have similar characteristics.

In particular, the report said they tend to be dividend paying securities with a strong intensity to the low volatility factor from mainly real estate and utilities sectors.

So far this year, the top 100 stocks in the S&P 500 owned by ETFs have underperformed the broader index by roughly 500 basis points due to their defensive bias.

Overall, ETFs in aggregate own 7.3% of the S&P 500 however, just 25 ETFs count for 5% of this figure.

Scott Chronert, managing director at Citi and co-author of the report, commented: “The dividend profile of a stock ultimately drives the ETF ownership (and impact) discussion. This analysis underscores the relevance of ETF impacts as company specific fundamentals evolve and change.”

Therefore, Chronert warned investors need to be aware of this driver as changes in fundamentals, such as company-specific dividend management, could have “profound” effects on single stock prices.

“For example, a highly ETF owned stock likely reflects a dividend influence,” he continued. “Should the dividend level flatten out, or even decline, index methodology rebalancing could trigger forced selling.”

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Furthermore, given the influence of dividend and low volatility ETFs on ownership, the analysts added one risk is higher interest rates, which could cause investors to redeem from these factors.

“Given the established connection between stocks with high ETF ownership and these factors, should these categories shrink meaningful, selling could be more severe,” Chronert concluded.