Markets stocks

Yes, The S&P 500 Is Exposed To Liquidity Risk

And passive investing plays a role.

To be clear, there is no question as to whether the epochal active-to-passive shift is a positive development for markets, on balance. But this is one situation where the throwaway phrase "on balance" should not be summarily dismissed as a perfunctory caveat. There are ramifications for market functioning when everyone is a passive investor. The list of such ramifications is long indeed, but one of the oft-repeated worries is that the proliferation of passive strategies (and even defining the term "passive" is no longer straightforward) is having a deleterious effect on price discovery. ETFs almost by definition encourage herding and indiscriminate buying. It stands to reason that if the buying is indiscriminate on the way up, the selling will be similarly indiscriminate on the way down. Indiscriminate capital allocation invariably leads to misallocated capital. It also encourages mindless participation in markets and discourages stock- and sector-level analysis. Of course, passive investing has also i) driven fees to (essentially) zero, ii) served to protect investors from an industry that can be predatory, iii) helped encourage long-term thinking and  iv) contributed to he
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2 comments on “Yes, The S&P 500 Is Exposed To Liquidity Risk

  1. George says:

    The real risk comes when passive is entirely driven by machine trading, CTA’s and such…. If you play in the fringes you can still survive and prosper but in the next Big Room is the Casino…Even the bigger hedge funds can be a prey species in there…

  2. OTR says:

    Do most pension funds really assume that illiquid assets will be used to fund short to medium term liabilities?

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