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What risks do exchange-traded funds pose?

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  • Grant TURNER
  • Vladyslav SUSHKO

Abstract

There has been remarkable growth in the exchange-traded fund (ETF) market over the past decade. For many investors in equities and bonds, ETFs have become a preferred investment vehicle, providing low-cost exposure to diversified portfolios through the tracking of an index, while also allowing frequent on-market trading. Notwithstanding these clear benefits to investors, ETFs may pose some market risks. Among the main risks is that heavy trading of ETFs adds to co-movement and volatility in security prices. Price dynamics in periods of stress could also be affected by investor expectations about continued high liquidity or possible impairment of the ETF primary-secondary market trading mechanism. Risks may become more acute if complex ETF structures were to grow to a bigger share of activity.

Suggested Citation

  • Grant TURNER & Vladyslav SUSHKO, 2018. "What risks do exchange-traded funds pose?," Financial Stability Review, Banque de France, issue 22, pages 133-144, April.
    • Handle: RePEc:bfr:fisrev:2018:22:12
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    Cited by:

    1. Pagano, Marco & Sánchez Serrano, Antonio & Zechner, Jozef, 2019. "Can ETFs contribute to systemic risk?," Report of the Advisory Scientific Committee 9, European Systemic Risk Board.
    2. Vladyslav Sushko & Grant Turner, 2018. "The implications of passive investing for securities markets," BIS Quarterly Review, Bank for International Settlements, March.
    3. Enrique Molina‐Muñoz & Andrés Mora‐Valencia & Javier Perote, 2021. "Backtesting expected shortfall for world stock index ETFs with extreme value theory and Gram–Charlier mixtures," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 4163-4189, July.

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