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How ETFs Change Price Discovery

Traders Magazine Online News, June 8, 2018

Nicolas Colas

The following is a reprint of an article that Nicolas Colas, Co-founder of DataTrek published recently.


How much Apple or JPMorgan stock do you think is locked up in US exchange traded funds?

The answer is 6% of outstanding shares in both cases, and I will go out on a limb and say you might be expressing surprise that number is so low. Yes, ETFs have gained substantial market share versus actively managed mutual funds over the last decade. And they will most certainly continue to grow. But they do not yet represent the 10-20% ownership we most commonly hear when we ask that question to market participants.

At the same time there’s no doubt the mechanics of US stock investing is changing. Instead of picking an active fund manager, investors from individuals to RIA, family offices, and large institutional investors now choose what we will call “Attributes”. These include geographic concentration, market cap, growth/value, sectors, and other basic investment characteristics.

These market participants then buy ETFs that mirror those attributes, shifting portfolio weightings over time to maintain diversification. The shift from choosing active managers to attribute-based ETF investing represents a fundamental change in how capital allocation works in US public markets. Traditional stock-by-stock analysis now shares shelf space with attribute-based investment evaluations.

As an example of ETF-based capital allocation, let’s compare the largest (by assets under management) 20 ETFs that own Apple and JPMorgan and see how much overlap there is:

•             Both appear in the 3 large S&P 500 trackers (SPY, IVV, VOO)

•             And in 9 ETFs that track the broader US equity market (DIA, VTI, RSP, ITOT, SCHX, SCHB, IWB, IWV and VV)

•             And 2 whole-world index funds (VT, ACWI)

The remaining 6 large ETFs that hold these stocks are, however, quite different:


•             3 value index funds (VTV, IWD, IVE)

•             A Financial sector fund (XLF)

•             A price momentum fund (MTUM)

•             A dividend yield-oriented fund (VYM)


•             3 growth index funds (IWF, VUG, IVW)

•             2 Tech sector funds (XLK, VGT)

•             A low price volatility fund (USMV)

•             (Note: Apple is also in the QQQs, of course, but since JPM is ineligible for the NASDAQ index we did not count it as “different”)

The simple conclusions:

•             JPMorgan is a play on Financials and value/dividend oriented investing, with some reliance on its relative price performance being better than the Financials sector generally.

•             Apple’s stock is levered to growth investing and interest in the Tech sector. Interestingly, it also has a foothold in “Low volatility”, an attribute not commonly shared by other Tech names.

The sharp-eyed reader will have looked at our 6% ownership number at the top of this section and muttered “Ha! It’s the flows that matter to stock moves!” Now that we know where JPM and AAPL get their “Big money” ETF capital we can fill that void in the analysis. Here are year-to-date flows for US Tech versus Financials and growth versus value, with data courtesy of

•             US Tech sector ETF inflows: $4.2 billion

•             US Financials sector ETF inflows: $3.0 billion

•             Winner: Tech, by $1.2 billion YTD

•             US Growth Equity ETF inflows: $5.4 billion

•             US Value Equity ETF inflows: $0.6 billion

•             Winner: Growth, by $4.8 billion YTD

As tempting as it would be to say “That’s all she wrote…” with this simple analysis, it obviously does not entirely explain why Apple is up 10% in 2018 and JP Morgan is flat. No one factor defines stock prices, after all. Our point, rather, is that as ETFs have multiplied they have created a stock market where investment attributes (sector, growth/value, etc.) play a growing role in setting marginal prices.

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