Passive ETFs are a great way for investors to get diversification benefits on the cheap, but one of the side effects is that as buying and selling the same basket of stocks (eg the S&P 500) becomes more popular, correlations among those stocks goes up. That’s clear enough, and studies back it up, but apparently it also drives up correlations with stocks outside the basket.
“Our model predicts that demand shocks to ETFs and futures lead to stronger price co-movement for index stocks and non-index stocks,” write Markus Leippold, Lujing Su, and Alexandre Zieglerof the University of Zurich in their...
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