Cause-and-Effect?

As we discussed yesterday, the markets react to and ponder both enormous amounts of change, as well as, much uncertainty around critical political and economic issues.  At times, markets can appear fragile and as evidenced by the minutes from the Federal Reserve’s September meeting, this may be more the case now than in other recent times.

In thinking about this potential market fragility, one statistic mentioned at last month’s ETP Investing and Trading Forum held here in NYC still resonates with many in the audience.  During the segment on High Frequency Trading and Exchange-Traded-Products, the presenter, who was terrific, referenced that approximately one third of the current volume on major exchanges could be attributed to Exchange-Traded-Funds.  Combining the thought of potential market fragility and the burgeoning, now somewhat pervasive ownership of Exchange-Traded-Products, could there be at least a contributing effect and/or a remote cause-and-effect relationship?

Ever since the advent of the recent years' Flash Crashes, there has been an ongoing debate within our asset management client community as to whether or not there was any cause-and-effect relationship by this growing proportion of ETP ownership and activity and market volatility.  Regardless of your position on the issue, one thing that is clear on both sides of the debate is that those asset managers responsible for gaining exposure to the various underlying securities have a desire to know and understand the proportionate relationship of underlyings to the Exchange-Traded-Products.

One way to begin delving into that relationship within the various sectors is through the S&P Grey Market Summary  which reflects the ownership levels (Long, Short, Absolute & Net) as a function of their respective Market Capitalization and their trading levels (Long, Short) as a function of the underlying constituent’s Average Daily Trading Volume.  This report contains the information described above for all 500 components of the S&P 500, includes information for the Leverage Factor as well as the Inverse and provides a sortable ranking by each category.

Asset Managers convey to us that the best way to utilize this application is to have isolated a certain sector or niche to which they want to gain exposure for their respective portfolio, then consult this report to understand the distinctions between the various securities within that sector and what the potential exposure each carries within the universe of Exchange-Traded-Products.

For example, let’s look at Apple Inc. ( AAPL) today which tops the list in largest absolute ownership by ETPs.  Apple carries a Long market exposure of $17.60B or 3.98% of its market capitalization as opposed to Microsoft Inc. (MSFT) who carries a Long Market Exposure of $11.25B or 4.07%.  Please take a closer look at this table ETFG Grey Market Summary for the Trading Statistics and other comparisons among the various underlying constituents that you may own and or in which you may have interest.

Thank you for reading ETFG Daily Perspectives.