Passive investment makes up about a fifth of daily turnover on the NZX Photo / File
Passive investment makes up about a fifth of daily turnover on the NZX Photo / File
Passive investment is on the rise, raising concerns among fund managers as to the impact it is having on market liquidity and prices.
The share market, which has rallied by just under a third in a little over 12 months, has been driven higher in part by the rising popularityof passive investment strategies available through the likes of exchange traded funds (ETFs).
A professional feud has been running for years as to the virtues of active funds management, where stocks are selected on their merits, and passive, where stocks are bought and sold purely in accordance with their relative weighting on an index.
Passive funds typically get "set" at the closing match - the last 15 minutes of trade - and the higher proportion of trades going through at the match is indicative of their influence, fund managers said.
NZX has followed the global trend, with the closing match now seeing 18 per cent of the day's value traded, tracking closely with other global exchanges, which see around 20 per cent traded going into the close.
"Increasingly you have seen the turnover migrate to the closing match and some broker estimates have that at 40 per cent on average, which is indicative of passive and broader ETF activity," Matt Goodson, managing director at Salt Funds, said.
"We are certainly seeing distortions in the closing match in New Zealand," he said.
"Some days you will see as much volume go through in the closing match as you would see trade all day on the market," Goodson said.
"Typically, those price distortions are to the upside. It's not unusual to see a move of 3 per cent or more in the closing match because of the structural growth in passive strategies - not just passive - but a whole variety of ETFs," he said.
Goodson said those distortions, usually to the upside, were concerning.
"There is a structural growth in these [passive] strategies, so the wind is very much blowing in one direction," he said.
"The real concern is that, as they become bigger and bigger, what happens if we see some sort of shock, some out-of-left-field macro shock?
"The concern would be if the liquidity in the passive ETF would greater than the liquidity underlying security that it owns," he said.
Matt Goodson, managing director of Salt Funds. Photo / Supplied
Passive investing is actively promoted by the NZX itself - through its investment product, Smartshares.
Rickey Ward, head of investment strategy at JBWere, said trading activity in the closing match was having an influence on the market.
"It's large volume in the match. It's a daily occurrence - it's not a one-off.
"It definitely has to have an influence on the market - both up and down," Ward said.
The rise and rise of passive funds, and their impact on daily trading, in New Zealand, is mirroring the experience on overseas markets.
Reuters reported last year the final five minutes of trading had become the busiest time of day for stock market traders in Europe - all because of the influence of passive funds.
"The growing popularity of passive and index-tracking funds and tougher regulations are driving the shift, which is draining liquidity in the US$11.1 trillion market and raising concerns about big price swings and possible disruption to price discovery," Reuters said.
Last September, Bloomberg reported that inexpensive index funds and ETFs had eclipsed old-fashioned stock pickers in the United States.
"Passive investing styles have been gaining ground on actively managed funds for decades," Bloomberg said.
Last year, assets in US index-based equity mutual funds and ETFs topped those in active stock funds for the first time.
