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Do ETFs Disrupt the Stock Market?

By Dan Caplinger and Mike Klesta - Feb 28, 2014 at 4:30PM

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Some believe exchange-traded funds can make markets behave badly, but the real answer is more complicated.

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 (^DJI 0.00%), the S&P 500 (^GSPC -0.88%), and other major market benchmarks, the huge amount of liquidity leaves ETFs such as the SPDR Dow Jones (DIA -0.72%) and the SPDR S&P 500 (SPY -0.81%) 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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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$31,029.31 (0.00%) $0.00
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$3,785.38 (-0.88%) $-33.45
SPDR S&P 500 ETF Trust Stock Quote
SPDR S&P 500 ETF Trust
SPY
$377.25 (-0.81%) $-3.09
SPDR Dow Jones Industrial Average ETF Trust Stock Quote
SPDR Dow Jones Industrial Average ETF Trust
DIA
$307.82 (-0.72%) $-2.23

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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