Markets so dominated by ETFs have not been truly tested by a post-QE world.
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Despite the evidence espoused by evangelists, the fact remains, markets so dominated by ETFs have not been truly tested by a post-QE world. Since the GFC, global central banks — especially the Fed — have served as market liquidity providers, filling the gap as regulation-restrained big banks have retreated from their traditional market-making roles (WILTW May 24, 2018). Much of that liquidity support has already been stripped away as QT has progressed.
Threats of a market crisis are rising, from geopolitical tensions and global growth concerns to the weakness of market leaders and over-indebted zombies. Therefore, the ETF liquidity question is more essential to evaluate than ever. And to our mind, the skeptic case is far more convincing than the evangelist case, meaning today more than ever, caution is an imperative.
One of the defining dynamics of the ETF-era — and the Digital Age as a whole — has been consolidation of power. On the exchange level, behemoths Vanguard, Blackrock, and State Street have seen their AUM skyrocket since the GFC (chart below). Vanguard alone owns at least a 5% stake in 491 stocks in the S&P 500, up from 116 in 2010, and roughly 7% of the entire index. As Vanguard founder Jack Bogle said last year, “Too much money is in too few hands.”
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