Index ETFs Increase Non-Index Stock Correlations [Study]

HFA Padded
Published on
Updated on

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…

This content is exclusively for paying members of Hedge Fund Alpha

Log In

Insider Strategies and Letters to Shareholders from the Top Hedge Funds and Maximize Your Portfolio Growth with Hedge Fund Alpha

Don’t have an account?

Subscribe now and get 7 days free!