Popularity of passive investing posing governance, market challenges
THE exchange-traded fund (ETF) industry has seen exponential growth since the US sub-prime crisis of 2008 - according to one estimate, more than US$3.5 trillion in new cash has moved into ETFs over the past 10 years alone.
Some reports say money in ETFs has already surpassed actively managed funds. The reasons are easy to understand - if most active fund managers are unable to beat their benchmark indices consistently, then it makes sense for investors to search for passive alternatives by simply buying and holding those indices in the form of ETFs.
Yet with tremendous growth comes new challenges. First, liquidity. As market watchers have noted, overall US liquidity - equity trading volume as a share of market capitalisation - has been declining since 2009 probably because of the rise in popularity of investing in tracker funds.
