The Exchange: Don’t Fear the Index Giants, and Volatility Trades Boom

(Bloomberg) -- Welcome to The Exchange, your round-up of the biggest and most interesting stories from one of the hottest corners of Wall Street.

In the week that started with the worst day since October for the Dow Jones Industrial Average and ended with a fresh record for the S&P 500: Academics said we shouldn’t fear the Big Three, the largest bond players vowed to buy more ETFs, and the SEC issued a volatility-linked note fine — just as a volatility-linked strategy soared.

These are the stories you need to read.

The Big 3: A Force for Good?

What happened: New research argues that so-called “common ownership” across the stock market can actually help reduce the chances of a crash.

Why it matters: For all the buzz about new products, most cash entering the ETF industry flows toward established, cheap funds. That means the big three money managers — BlackRock, Vanguard and State Street — now own vast swaths of the market. It raises questions about everything from corporate governance to price moves, but this research suggests it might not be so bad.

What’s in our story: We unpick a wonky new paper to deliver it in plain English, plus we show how academic insights in this space have often delivered confusing conclusions.

Read it here.

Everybody Loves Bond ETFs

What happened: State Street’s survey of institutional investors showed that 70% are planning to increase their use of bond ETFs.

Why it matters: One of the biggest historic barriers to fixed-income ETF growth was that the largest players didn’t trust them. Their performance during the Covid crash — providing a vehicle for price discovery when trading ground to a halt elsewhere — has won them over, and a major shift is underway. 

What’s in our story: Tasos Vossos reports the survey results and connects them with the latest stats on ETF usage.

Terminal users can read it here.

Thrill of Living Dangerously

What happened: The SEC announced a fine related to selling volatility-linked products — just as a volatility-linked product trounced most of the market.

Why it matters: Controversy never seems to leave this complex breed of ETF, and yet investors love them. Monday’s performance helps show why.

What’s in our story: We detail a surge in one of the remaining big volatility ETFs in the context of the SEC’s settlement with UBS over selling similar products.

Read it here.

Weekend Reading

• Wall Street-Tracking ETF Suffers Worst Outflow Since 2008 Crisis.
• AMC Gets ‘Low Priced’ Tag in New ETF Hit by Indexing Quirk.
• New Female-Led ETFs Are Bringing ‘Do More Good’ Mantra to U.S.
• Record Cash Floods China Tech ETF as Cathie Wood Keeps Selling.

Limited Intel

One reason for the torrent of inflows to ETFs in early 2021 was that some previously ignored areas of the market finally started performing. Value, small caps and emerging markets contributed $138 billion, or about one-third, of the $380 billion taken in through the end of May.

Those areas have since stumbled. Unless they can regain momentum, the wild flows seen in the ETF market this year may slip to $2.5 billion a day from $4 billion.

ETF Jeopardy!

A $2.6 billion fund that is bullish tech, this ETF has seen chunky inflows and then outflows multiple times in recent weeks. That pattern is often a sign of tax heartbeat trades, but in this case it looks like a series of bets on stocks bouncing — the product delivers three-times the performance of a tech share index, and the pattern has shown up during previous pullbacks.

That’s the answer. The question identifying this fund will appear next week.

Last week’s question: What is the VanEck Vectors Semiconductor ETF , ticker SMH?

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