Institutional Investor | Passive, But Out of Control

The market is unprepared to cope with how large the ETF industry has become, says Highland Capital’s chief investment officer.

When Mark Okada, co-founder and CIO at Highland Capital Management, saw news that index fund giant Vanguard Group’s inflows were larger than all other asset managers’ combined for the first quarter of 2016, he said he was worried.

In December of last year alone, according to Morningstar, passively managed funds took in a record $50.8 billion.

The hulking size of ETFs — and what happens when ETF buyers become sellers — is a question keeping Okada up at night, the money manager told reporters at a May 25 lunch in New York City. “They’ve gotten so big so fast,” he said by phone Tuesday. “I don’t know if the market knows how to risk manage ETFs in the opposite direction.”

ETFs could play a big role in the next recession or financial crisis, according to Okada, and passive-fund managers need to be prepared to manage risk in a “different type of market structure.”…

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Ruozhou Wang