Fears of ETFs Disrupting Markets May Be Overdone
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What insurance gaps and housing data lead the Money Briefing introduction?
I'm J.R.
Whalen in New York. Are ETFs getting a bad rap when the topic is market disruptions? We'll take a closer look in a moment. First, these money headlines. Ahead of the height of the Atlantic hurricane season, government data indicates many U.S. homeowners are inadequately insured for natural catastrophe damage. often failing to increase policy limits if they expand or upgrade their homes. This was most pronounced in the wake of three major landfalling hurricanes in 2017, Harvey, Irma and Maria, that revealed a widespread lack of full insurance coverage for homeowners. in Texas, Florida, Puerto Rico, and elsewhere. And hurricanes weren't the only disaster that exposed issues last year. Following devastating wildfires in Northern California in October, the consumer advocacy group United Policy Holders said that two-thirds of the victims said their insurance wouldn't fully cover the cost of repairing or replacing their homes.
Meanwhile, housing starts declined 2.3 percent in June from the prior month to a seasonally adjusted annual rate of about 1.2 million. It was the largest monthly percent drop in about a year and a half, driven by construction declines in all regions of the U.S. for almost all types of housing. And the drop could point to construction labor shortages and rising material costs causing more damage to the housing market than many analysts initially believed.
How are natural disasters exposing homeowners' inadequate insurance coverage?
At the same time, residential building permits, which can signal how much construction is in the pipeline, fell 2.2 percent from May, which surprised economists who were expecting a 2.2 percent gain in June. And companies like Amazon, Target, and Walmart are trying to solve one of the toughest problems in home grocery delivery, getting food to doorsteps in the same condition consumers would expect if they went to the store themselves. And Fresh Direct has built a 400,000 square foot automated distribution center in the Bronx, New York, in hopes of cutting down the time it takes to get fish, for example, from the boat to the dinner table. And timing is essential. Delivering perishable products is more of a challenge than dropping off, say, paper towels or dog food.
Fruit can be bruised, meat spoils, and eggs break. Botched deliveries can also upend dinner plans, leaving customers angry and hungry. While online sales at $14 billion remain just a morsel of the more than $700 billion-plus U.S. grocery market, U.S. e-commerce sales of food and alcohol are projected to reach roughly $40 billion by 2021. This is your Money Briefing from The Wall Street Journal. Welcome back, everybody. There's a concern among some investors that an influx of money into passive investments, including ETFs or exchange-traded funds, could possibly disrupt the markets in a widespread fashion. But Wall Street Journal reporter Ajlan Loder is here to explain why that fear could be overdone.
So, Ajlan, S&P Global has answered these concerns, and they say that, yes, the money flows can swing stocks, but that's about it.
Yeah, and this is the latest in a long-running debate about the impact of passive investing on the markets. And what S&P concluded was quite interesting. They looked at all index strategies, ETFs, mutual funds, and they concluded that on February 8th, when the market was down almost 3.8%, that index strategy outflows accounted for about a third of that, which is not inconsiderable.
And can you just explain the differences between ETFs and mutual funds for a moment? They have a lot of similarities, but also some key differences.
Yeah, so exchange-traded funds, just like mutual funds, take every stock in, say, the S&P 500 and wrap it into sort of a single, easy package. The difference here is that exchange-traded funds can be, as the name implies, bought and sold on the exchange all day, whereas mutual funds can't. And there are some who say that the tradability really attracts people who want to buy and sell them far more quickly and that that means that flows are sort of sloshing in and out of the markets at a greater velocity than they had in the past.
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