ETF flows inflate large stocks, raise systemic risk as bitcoin slumps and EM ETFs draw inflows
Passive and thematic ETFs are pulling markets in different directions, raising questions about how much risk is hiding in vehicles that many investors treat as routine tools.
According to BNN Bloomberg, Michael Green, chief investment strategist at Simplify Asset Management, says passive ETF flows are creating “a systemic risk for traders” as Canadian investors pour money into exchange-traded funds.
He argues that passive investments “disproportionately boost large volatile stocks” because “everything in the index is in proportion to its market capitalization.”
Green says that structure “ends up pushing the securities that are the largest and most volatile components of the index up disproportionately,” and that when “the next dollar in … sometimes the next minute” arrives, it pushes those same names “even further in that same direction.”
BNN Bloomberg reports that Green sees “the constant inflow of funds to ETFs” as having distorted markets by pushing company valuations above their true worth.
Rather than pricing stocks based on how a company performs, he says passive investments bunch securities together and increase the correlation between stocks and their index.
That, he says, means “a company’s price is driven by the money flowing in rather than by it’s fundamentals.”
Green notes that investors have benefited from a reduction of fees independent of market cap, but warns that “liquidity does not scale with market capitalization and so bias has been created in the market as we have grown passive.”
According to BNN Bloomberg, he describes “a remarkable disconnect between the economic underpinnings and the actual performance of the securities that creates a systemic risk, one that can’t really easily be diversified or hedged.”
He adds that passive investments and correlated stock behaviour lower future returns and says “we have very clear evidence that this is actually what is happening in markets.”
Green also links this to “many of the social ills that we experience” as governments base retirement investments in passive vehicles, “particularly those that are focused on large cap stocks.”
In crypto, deep price losses contrast with more measured behaviour in ETF flows.
CNBC reports that bitcoin has slumped from a record price above US$126,000 last October, losing almost half its value and more than 25 percent in the past month.
The decline has “darkened sentiment across the crypto landscape,” shaken faith in bitcoin as a digital rival to gold as a store of value, and raised fears of another “crypto winter” similar to the period around the FTX crash in 2022, when bitcoin fell from near US$50,000 to as low as US$15,000.
Yet, as per CNBC’s “ETF Edge,” recent flows into and out of bitcoin and crypto ETFs suggest long-term investors are not abandoning the asset class.
Over the past three months, the iShares Bitcoin Trust (IBIT) has seen about US$2.8bn in net outflows, which it calls substantial.
Over the past year, however, the BlackRock ETF has attracted nearly US$21bn in net inflows, according to VettaFi.
The broader spot bitcoin ETF category shows a similar pattern: roughly US$5.8bn in net outflows over three months, but positive net inflows of US$14.2bn over the past year.
Money is exiting, but CNBC notes that “the majority of assets have remained in place.”
“It’s not the ETF investors who are driving the sell off,” said Matt Hougan, Bitwise Asset Management CIO, on “ETF Edge.”
He says much of the broader pressure may come from crypto investors who built positions over many years and are now trimming exposure, along with hedge funds and short‑term traders who use the most liquid ETFs as tools and pull capital quickly when momentum turns negative.
At CNBC’s Digital Finance Forum, Galaxy CEO Mike Novogratz said the crypto market’s “era of speculation” may be ending and that returns will look more like those from a long-term holding.
“It’s going to be real world assets with much lower returns,” he said, adding that “retail people don’t get into crypto because they want to make 11 percent annualized,” but because “they want to make 30 to one, eight to one, 10 to one.”
Will Rhind, founder and CEO of GraniteShares, told “ETF Edge” that “it’s tough to be a bitcoin investor right now,” pointing to the performance of other “hard” assets such as gold.
For investors who backed the “digital gold” concept, he said of this period, “this is not supposed to happen” when bitcoin is going down nearly 50 percent and “gold’s not supposed to go to all time highs.”
Away from crypto, risk appetite is returning in emerging markets, with a tilt toward more active ETF strategies.
Bloomberg reports that the Avantis Emerging Markets Equity ETF, the largest actively managed emerging‑markets equity ETF, saw US$429.5m in new cash on a single Friday, its largest daily inflow since 13 May, pushing assets to a record US$20.3bn.
The surge came the same day the Supreme Court struck down President Trump’s sweeping global tariffs.
Trump later announced a new 15 percent across‑the‑board levy “which effectively resets the playing field for America’s trade partners” by removing more punitive tariffs on India, China and Brazil.
“Though it’s probably not the end of the story, the headline is a net positive and markets should respond positively to the removal of policy uncertainty,” said Malcolm Dorson, senior portfolio manager at Global X Management Co.
Bloomberg reports that emerging‑market equity ETFs have attracted more than US$35bn in net inflows this year, with equity benchmarks from Brazil and Colombia to South Korea hovering near all‑time highs.
The roughly US$553bn emerging‑market equity ETF universe is still more than 90 percent passive by assets, but active funds are “gaining momentum,” pulling in nearly 15 percent of year‑to‑date inflows.
“Many investors aren’t happy with the traditional index, which is about 80 percent Asia and over 25 percent China,” Dorson said.
He told Bloomberg that investors are “shying away from the benchmark concentration risks” by moving assets to active managers and creating their own allocations via single‑country ETFs, with growing interest in Latin American markets such as Argentina, Colombia and Brazil.
