One Cause of Market Turbulence: Computer-Driven Index Funds
In many ways, this stampede toward passive investing — in which people put their money into funds
that track indexes and broader market themes as opposed to relying on human stock pickers — is uncharted territory.
After propelling the market to historic highs, passive investment strategies — which follow a simple set of rules
and are carried out by sophisticated computer programs, not humans — are among the factors fueling the market’s recent plunge.
market — its robots buying stocks just as they were programmed to do,” said Steven
Bregman of Horizon Kinetics, a firm that hunts for undervalued stocks.
The popularity of E. T.F.s has concentrated unparalleled financial power in BlackRock
and Vanguard, the two biggest providers of index funds and E. T.F.s.
This week, as markets shuddered, exchange-traded index funds were responsible for 38 percent of total stock
trading on some days, an astonishing figure given that these funds were just a curiosity 10 years ago.
Earlier this week, they were big sellers when the so-called VIX index — a measure of anticipated market volatility — skyrocketed
Martin Small, who oversees United States-based E. T.F.s at the firm, said the high share of E. T.F.
But as the market fell and trading in BlackRock funds accelerated, there was little sign of panic or emotion among the E. T.F.