There's A Direct Correlation Between Market Volatility And ETF Usage

In a new report, analysts at Goldman Sachs discuss the exploding world of exchange treaded funds (ETFs). In the report, analysts explain the relationship between ETF trading and market volatility, and they highlight the ways that ETF trading can impact the share prices of individual stocks.

The Numbers

ETF assets under management (AUM) now stands at a whopping $2 trillion. This number is 10 times the ETF AUM of a decade ago. During the past 10 years, U.S. equity ETF inflows have grown roughly 25 percent annually. ETFs now account for up to 30 percent of U.S. equity trading volume.

Related Link: Building A Currency-Hedging Framework Using ETFs

Volatility And ETF Trading

Analysts point out the correlation between ETF trading volume and the VIX volatility index. As the VIX rises, ETFs' percentage of trading volume climbs along with it.

In other words, traders seem to take comfort in the diversity of ETFs when they become fearful of owning individual stocks.

Impact On Single Stocks

Analysts explain that investors should be aware of the ways that ETF-related trading activity can impact individual stocks. “Indeed, the outsized growth in ETFs coupled with lower market liquidity lays the stage for a cocktail of single stock impact that few investors, we believe, fully appreciate,” analysts write.

One Example

In the report, analysts use Boston Properties Inc BXP as one example of an individual stock that is heavily influenced by ETF trading. The iShares U.S. Real Estate Sector ETF IYR is one of the most popular and heavily-traded ETFs, and Boston Properties holds a 2.5 percent weighting in the fund.

According to analysts, ETF-related rebalancing from the BXP alone accounted for about 10 percent of Boston Properties’ trading volume over the past month.

When other ETFs that hold Boston Properties, such as the Vanguard REIT ETF VNQ and the Financial Sector SPDR ETF XLF, are taken into consideration, analysts estimate that nearly 20 percent of Boston Properties’ total trading volume could have been driven by ETF trading.

Most ETF-Influenced

Analysts list dozens of stocks that can likely attribute greater than 10 percent of their trading volumes to ETFs. Many large REITs derive more than 10 percent of volume from the IYR, including Simon Property Group Inc SPG and American Tower Corp AMT. In addition, several big energy names are heavily influenced by the Energy Select Sector SPDR ETF XLE, including Exxon Mobil Corp XOM, Chevron Corp CVX, and Schlumberger Ltd SLB.