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“During periods of market turbulence, ETF secondary market trading [of ETF shares] volumes rise – both in absolute terms and as a share of total stock market trading – as investors, especially institutional investors, turn to ETFs to transfer and hedge risks quickly and efficiently,” she says. Valentin Haddad, co-author of a 2022 academic paper that argues the rise of passive investing is distorting price signals and pushing up the volatility of the U.S. stock market, also thought the upsurge in ETF usage was evidence of the departure from their use simply as long-term portfolio building blocks. Instead, he believed investors were increasingly trading on macroeconomic news in the current environment – something “ETFs are particularly well suited for.
Investors poured a net US$609-billion into U.S.-listed ETFs last year, even as the market tanked and a record US$1.1-trillion was pulled from U.S.-domiciled mutual funds. One of the arguments proponents of ETFs use is that even though ETF share trading has increased in the so-called secondary market, trading of their underlying securities in the primary market, involving creation and redemption of ETF shares, remains minimal.