SINGAPORE (Dec 24): As the year-end approaches, heightened levels of volatility and intermittent market selloffs are becoming the norm. A 500-point move in the US Dow Jones Industrial Average in a single session is no longer unusual.

Unsurprisingly, some market watchers are placing some of the blame on the continued popularity of exchange-traded funds, and suggest that the catalyst for the next bear market could have its genesis in the behaviour of ETFs. Index investing, market watchers say, could cause the next financial crisis.

Since the global financial crisis in 2008, assets under management (AUM) for ETFs have grown from around US$800 million ($1.1 billion) to about US$6.32 trillion in mid-2018, according to data from Bloom berg. In its report titled “Ten Years after the Global Financial Crisis: A Changed World”, JPMorgan says: “The shift from active to passive assets, and specifically the decline of active value investors, reduces the ability of the market to prevent and recover from large drawdowns. The US$2 trillion rotation from active and value to passive and momentum strategies since the last crisis eliminated a large pool of assets that would be standing ready to buy cheap public securities and backstop a market disruption.”

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