Exchange-traded Funds, Investment Strategies, and Financial Stability

Title data

Baumann, Michael Heinrich ; Baumann, Michaela ; Herz, Bernhard:
Exchange-traded Funds, Investment Strategies, and Financial Stability.
2018
Event: Digitale Wirtschaft : Jahrestagung 2018 des Vereins für Socialpolitik , 02.-05. September 2018 , Freiburg im Breisgau.
(Conference item: Conference , Speech )

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Exchange-traded Funds (ETFs) are easy to understand, cost-efficient, and liquid investment vehicles based on market indices that have become very popular for both institutional and retail investors. The dynamics of the index and its underlying assets are closely interlinked based on the rebalancing effect and depend among others on the different types of traders in the market, price trends in individual stocks and the overall market, as well as over- or undervaluation of individual stocks and the index. Investing in an index of assets via an ETF can generate quite complex and sometimes counterintuitive investment behaviors on the level of individual assets. Seemingly stabilizing investment strategies, such as a fundamentalist approach, on the level of the ETF might actually lead to destabilizing effects on the level of individual stocks.