Photo: Courtesy of MGM
Dave Lutz, a strategist who heads ETF trading at Stifel Nicolaus, is noticing a disturbing trend in his market, and he says it’s something that no one is giving any attention.The ETFs that have become so popular among traders, Lutz says, are “cannibalising” the stocks that they are supposed to track – leading to choppier trading for investors in the underlying stock.
The problem all boils down to the “float,” or the number of shares a company issues to the public for trading on an exchange.
Lutz says that all of these ETFs purchasing up shares of stocks they’re meant to track is causing the actual, “tradable” float to be a lot smaller than the official number suggests, writing, “When ETFs hold shares, some are [loaned out] for short-borrowing – but the vast majority essentially are ‘warehoused,’ and in my opinion, should be removed from the float.”
Because there are less shares of certain stocks “warehoused” by ETFs being traded in the market, trading in those names will be less liquid than the “float” number would normally indicate and, as a result, will be more volatile.
Lutz takes his own firm, Stifel Nicolaus, as an example. The official float on Stifel stock (ticker symbol SF) is 49.7 million shares. ETFs hold 6 per cent of those shares. Passive index funds hold another 16 per cent of SF shares.
That means a total of 22 per cent of SF shares are being “cannibalised” by the ETFs and index funds that hold them, says Lutz, and investors in individual stocks need to adjust their calculations accordingly, or get caught off guard by unexpected volatility and decreased liquidity.