The massive growth in ETF investments: Do they calm or distort the market?

Abstract

The demand for ETFs is increasing globally every year and it is one of the most popular investment products. What concerns both academics and practitioners is the question of which effect the boom in passive investments will have on the market. In this conceptual paper, we discuss on a conceptual-theoretical level which effects ETFs can have on the capital market and place the importance of active managers and informed investors at the forefront of considerations. We argue for a long-term balance between ETFs and informed investments and against a market-destructive effect of ETFs, taking into account the respective market advantages.