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What Impact Is Passive Investing Having on the Market? Try None

Conventional wisdom says that as passive investment strategies grow, they would affect stock prices. The data shows otherwise.

By Dani Burger

(Bloomberg) --For all the handwringing about how the growth of passive investing strategies is distorting the stock market, it turns out that may not be the case.

After running the numbers, Macro Risk Advisors’s Pravit Chintawongvanich estimates that $3.3 trillion, or 14.4 percent of the S&P 500 Index’s market capitalization, is held passively. However, there’s virtually no market impact from it. Correlations remain at all-time lows and the amount of shares that are passively managed isn’t affecting single-stock volatility, he found.

Chintawongvanich’s analysis runs counter to the onslaught of fear prompted by the 150 percent growth in U.S.-listed exchange-traded fund assets over the past five years.

Conventional wisdom has held that as passive investment strategies accumulate larger piles of assets under management -- the 14 percent represents an all-time high -- it would lead to lockstep moves in stocks, making life harder for traders seeking informational edges by offering fewer opportunities to capitalize on insights into earnings and other signals. Instead, the MRA data show, that any reaction in the market has been muted -- if there’s even been one at all.

So looking at the numbers, it’s probably time to find a different culprit behind the lack of market volatility. Perhaps Tinder?

TAGS: Equities
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