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The Revenge of the Stock Pickers
When an exchange-traded fund (ETF) trades heavily around a theme, correlations among its constituents increase significantly. Even some securities that have little or negative exposure to the theme itself begin to trade in lockstep with other ETF constituents. In other words, because ETF investors a...
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Published in: | Financial analysts journal 2019-01, Vol.75 (2), p.34-43 |
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Main Authors: | , , , , |
Format: | Article |
Language: | English |
Subjects: | |
Citations: | Items that this one cites Items that cite this one |
Online Access: | Get full text |
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Summary: | When an exchange-traded fund (ETF) trades heavily around a theme, correlations among its
constituents increase significantly. Even some securities that have little or negative
exposure to the theme itself begin to trade in lockstep with other ETF constituents. In
other words, because ETF investors are agnostic to security-level information, they often
"throw the baby out with the bathwater." As the prices of individual stocks
get dragged up or down with ETFs, these mispricings can become significant, and the
profits realized by taking advantage of them may present an opportunity for stock
pickers.
Disclosure: The authors work for an active investment manager involved in stock picking. The
views expressed in this article are those of the authors and do not necessarily
reflect the views of T. Rowe Price. Further information can be found at the end of
this paper.
Editor's note
Submitted 10 September 2018
Accepted 7 January 2019 by Stephen J. Brown
The views expressed are those of the authors, are subject to change without notice, and may
differ from those of other T. Rowe Price associates. Information and opinions are derived
from proprietary and nonproprietary sources deemed to be reliable; the accuracy of those
sources is not guaranteed. This material does not constitute a distribution, offer,
invitation, recommendation, or solicitation to sell or buy any securities; it does not
constitute investment advice and should not be relied upon as such. Investors should seek
independent legal and financial advice, including advice as to tax consequences, before
making any investment decision. Past performance is not a reliable indicator of future
performance. All investments involve risk. The charts and tables are shown for
illustrative purposes only. |
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ISSN: | 0015-198X 1938-3312 |
DOI: | 10.1080/0015198X.2019.1572358 |