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102 sats \ 2 replies \ @SimpleStacker 20h \ on: There Are Now More ETFs in US Than There Are Individual Stocks - Bloomberg charts_and_numbers
This is problematic because it actually makes all stocks more correlated and makes diversification harder to accomplish, since so many stock prices are just driven by ETF fund flows.
Another problem is that it has the potential to disconnect stock prices from estimates of valuation, since, again, the prices are driven by ETF fund flows. It thus becomes more a matter of predicting which ETFs are going to be piling into the stock rather than anything fundamental to the company itself.
This is super helpful! Thanks for the explanation. I was feeling that it didn't seem like a big deal, but clearly it is more significant than I thought.
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Similar thing happened with mortgage backed securities prior to the 2008 financial crisis.
Investors thought geographically diverse portfolios of mortgages were safe because local housing markets were supposed to be uncorrelated.
But they didn't realize that the aggregate boom in MBS demand was raising house prices everywhere at the same time, creating correlations that didn't exist in the historical data. So when the housing markets started imploded, they started imploding everywhere
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