Widely popular ETF assets the culprit behind STI's baffling plunge: analyst

Blue chips are being knocked down.

The widespread popularity of Exchange Traded Funds (ETFs) may be a key culprit behind the Straits Times Index’s steep drop in recent trading sessions.

“We may be starting to see the effects and influences of indices and index tracker funds, especially from funds invested in the growing ETF space. The drop in the local STI is unusual for an index traditionally used in a flight to quality or safety. Given the months ahead aren’t looking too promising, this acute pullback is notable, particularly in how quickly it has come about,” said Nicholas Teo, analyst at CMC Markets.

ETFs are funds that are made up of a basket of stocks or bonds that are listed and traded on the exchange. They provide investors access to instant diversification in a single trade, as well as allow exposure to international securities without having to select individual stocks.

This simplicity has made ETFs popular with retail investors. For instance, the Singapore Exchange has 19 ETFs that are available to all retail investors.

However, Teo noted that retail investors aren’t the only ones using these instruments--large funds and institutional investors are also cashing in on the ETF party.

“When traditional fund managers sell, they usually just get out, quickly and in dramatic fashion. When funds are switching, they usually sell stocks or markets and buy others with the proceeds of the original sale. This time it seems like the tide is going out but refusing to come back in, even after its regular, daily cycle. Just as strange, this selling does not feel like retail selling either, as index stocks are the ones primarily being knocked down,” Teo said.

Instead of just tracking markets, ETFs have grown so powerful that they now have the capacity to move markets, Teo said, citing a recent report by the Financial Times.

“What makes this sell down of Singapore and Asian markets slightly baffling is the lack of panic that would characteristically accompany such meltdowns. Instead, the sell down in Asian markets this past months has been plagued by a consistent supply of stocks, offered and replenished in size on a daily basis (on the bid side of the buy/sell equation mostly). This is executed in an eerie, almost mechanical fashion,” he noted.

“Amongst the more popular and larger Asian ETFs, the iShares MSCI All Country Asia ex Japan ETF and the NYSE Arca-listed iShares MSCI Pacific ex Japan ETF have seen their number of shares outstanding decline by 20% and 10 % respectively since May this year. It looks like it may take a little while longer before the ‘tide’ returns,” he cautioned.