When Mark Okada, co-founder and CIO at Highland Capital
Management, saw news that index fund giant Vanguard
Groups inflows were larger than all other asset
managers combined for the first quarter of 2016, he said
he was worried.
In December of last year alone, according to Morningstar,
passively managed funds took in a record $50.8 billion.
The hulking size of ETFs and what happens when ETF
buyers become sellers is a question keeping Okada up at
night, the money manager told reporters at a May 25 lunch in
New York City. Theyve gotten so big so fast,
he said by phone Tuesday. I dont know if the market
knows how to risk manage ETFs in the opposite
ETFs could play a big role in the next recession or
financial crisis, according to Okada, and passive-fund managers
need to be prepared to manage risk in a different type of
What if, he offered as an example, U.S. President Donald
Trump decided to go to war with North Korea? Wed
probably go into a risk-off period, Okada said.
Weve never been able to test this in a market so
saturated by ETFs.
But ETFs have been around for a long time and managed to
weather the tech bubble bursting and the 2008 financial crisis,
argued Will Rhind, the founder of commodities ETF Granite
Shares. Whenever theres any new technology or wave
of investing, there are always naysayers who want to say the
sky is falling,
Still, though, there were far fewer ETFs in the equities
market then than there are now. More indexes of equities now
exist than actual US-listed stocks a statistic reported
earlier this month by Bloomberg that has become a favorite
among asset managers and industry pundits.
Okada finds the situation concerning, while acknowledging
that he doesnt want to call the market on
competing styles of money management. I wouldnt
recommend someone being exclusively passive, Okada added.
I just worry that some people just put everything into
the passive basket. They wont be able to pick up the
pieces in different market situation.
But Okada and others need not worry, according to Kevin
Quigg, chief strategist at customer satisfaction-based ETF ACSI
Funds. Exchange-traded funds own 6.3 percent of an average
listed companys shares, Quigg pointed out in a phone
interview, citing statistics from Toroso Investments.
Relative to the larger investing industry, ETFs are a
small component, Quigg said.
One could voice the same concerns about mutual funds, he