RT Journal Article SR Electronic T1 The Impact of Flows into Exchange-Traded Funds: Volumes and Correlations JF The Journal of Portfolio Management FD Institutional Investor Journals SP 96 OP 107 DO 10.3905/jpm.2018.44.7.096 VO 44 IS 7 A1 Ananth Madhavan A1 Daniel Morillo YR 2018 UL https://pm-research.com/content/44/7/96.abstract AB There is a common perception that the recent growth in passive index investing through exchange-traded funds (ETFs) has had detrimental effects on the market quality of the underlying basket securities. In particular, there is concern that ETF trading substitutes for and takes away from liquidity in the underlying securities and increases the co-movement in their returns. In turn, it is argued that increased pairwise correlation among stocks impairs price discovery and the ability of active managers to generate alpha. In this article, the authors find no evidence to support these perceptions. Volume changes in ETFs and their underlying securities are positively, not negatively, correlated. Furthermore, this research indicates that the rise in cross-stock correlations is due to the macro environment, not ETF growth.TOPICS: Exchange-traded funds and applications, security analysis and valuation, statistical methods