WSJ: The Downside of ETFs

By SIMON CONSTABLE

There is a lot for investors to like about exchange-traded funds, but there is also a downside for the stock market, a new study says.


Many investors like ETFs because the funds are an easy way to build a diverse portfolio with fees that generally are lower than those of mutual funds.


Now a group of academics offers a different take. A working paper titled “Is There a Dark Side to Exchange Traded Funds (ETFs)? An Information Perspective,” by professors at the Arison School of Business in Israel, Stanford University and the University of California, Los Angeles, says the popularity of ETFs has led to higher trading costs for some stocks, as well as less coverage of stocks by analysts to help investors make decisions. It also has reduced the responsiveness of some stock prices to information about the companies behind them and made it harder for investors to diversify their holdings in a way that reduces their risk, the report says.

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