An is a package of securities you can buy and sell on an exchange like a single share. The common claim is that it makes the market more efficient, and trading in it is not always connected to the companies inside it. What does that do to their prices?
Both at once, through the same channel. A review found that trading in the package can pass information quickly into the prices of the shares inside it. But when investors trade the fund out of a short-term need rather than news about the companies, that pressure passes into their prices too. So an advantage in and can arrive together with that tells you nothing new about a company.
A fund and its shares are linked by transactions that narrow the gap between the fund’s price and the value of its assets. That link is what lets information pass between them.
When the fund is traded on economic information, the passage may help the market price assets. This is the positive side of price discovery.
The same channel can also carry demand that does not come from news about the companies, such as short-term trading in the fund. In that case a price movement is not necessarily a signal about the company’s business.
The review stresses both sides. It does not say exchange-traded funds are always harmful or that every movement in them is noise.
wat. Exchange-traded funds can help a price reflect information, and still add movement that originates in trading the fund itself.
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An investment product that is convenient for an investor can also change the way other share prices get set.
How do we know?
An academic review gathered studies on trading in exchange-traded funds, on how their price tracks the value of their assets, and on how the component shares respond.
What is still unknown
This is a review of mechanisms and findings from different periods and markets, not a uniform estimate of the effect of every fund or any investment recommendation.
Learn something?
Where to next
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