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Do ETFs Disrupt the Stock Market?

Exchange-traded funds have never been more popular. But some believe ETFs are distorting markets and causing disruptions to normal investing activity. Should investors fear ETFs and their influence?

In the following segment from the Fool's video guide to investment planning, Motley Fool director of investment planning Dan Caplinger talks with Fool markets/IP bureau chief Mike Klesta about the potential disruptive effect of ETFs on markets.

Dan notes that when it comes to the Dow Jones Industrials (DJINDICES: ^DJI  ) , the S&P 500 (SNPINDEX: ^GSPC  ) , and other major market benchmarks, the huge amount of liquidity leaves ETFs such as the SPDR Dow Jones (NYSEMKT: DIA  ) and the SPDR S&P 500 (NYSEMKT: SPY  ) with only a negligible impact on market activity. With niche markets, however, Dan says the potential for disruption is much higher, especially for indexes that have only a small number of stocks. Dan concludes that investors should watch out for how ETF trading can affect markets, but sticking with tried and true large ETFs is typically a good way to protect yourself.

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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