What is the demonization of a currency

"Insane overconfidence of active managers"

Since around 2015, it has become more and more common to read in the media that the market share of index funds and ETFs is "now dangerously high" or, if it continues to grow, could lead to a "systemic risk". This criticism is exemplified in the following quotes:

  • "The quiet path into bondage: Why passive investing is worse than Marxism" (title of a research memo on index funds by the American stock broker Sanford Bernstein in August 2016)
  • "Indexing is a massive threat to the stability of the financial system" (Saker Nusseibeh, CEO of the British fund company Hermes Investment Management in the Financial Times of September 26, 2016)
  • "ETFs harbor enormous dangers and in many cases are even a sham" (Rainer Laborenz, Managing Director of Azemos Verm√∂gensmanagement GmbH, Offenburg, in an article on the finance portal Fondprofessionell on July 28, 2017).

Before I go into the substantive side of the arguments of the ETF critics, one point should be noted in advance that is helpful for understanding this criticism: The ETF rejection comes predominantly from representatives of the financial sector, who have changed their business model and fee income due to the growing popularity see threatened by ETFs - that is, by representatives of "active" investment management with a - when it comes to the assessment of ETFs - barn-gate-large conflict of interest. On the part of the neutral institution of science, there are hardly any more recent publications that classify the small but growing market share of index funds, including ETFs, as a systemic or structural problem. Therefore, if you read a tirade somewhere against the alleged structural or systemic risks of ETFs, it is worth looking carefully at who is railing there. [1]

In terms of content, the Anti-ETF arguments split into two categories: Category A arguments aim at the legal ETF structure (in contrast to the economic risks of the asset class that an ETF represents). This legal structure is - quite unspectacularly - a variant of the generally highly regulated so-called UCITS investment funds, in general "public funds". Category B. refers to so-called "systemic" risks that the spread of indexing (passive investing) is supposed to cause. Specifically, this means that index funds and ETFs are displacing other forms of investing in stocks and bonds. In addition, the "oversized" market power of the three largest ETF providers and the possible effects in the event of their collapse on the capital markets are also the subject of criticism.

Category A arguments (Risks from the ETF structure) first arose around 2010 shortly after the peak of the great financial crisis. Since then, that discussion has fizzled out. None of the alleged or at least theoretical structural risks described at the time from "synthetic" ETFs (swap ETFs), inverse ETFs (short sale ETFs), leverage ETFs (leveraged ETFs) or from securities lending has materialized in a relevant way. The shares of the three special ETF forms mentioned in the total ETF market volume are low and falling (swap ETFs) [2] or negligible (inverse ETFs, leverage ETFs). Any active mutual fund may operate securities lending, not just ETFs. The reason why securities lending is always only discussed as a risk in connection with ETFs can be attributed to the clever public relations of the active asset management industry (see introductory quotes).