When Hedge Funds Milk ETF Investors

LONDON − ETFs are great investments. They are low-cost and easy to understand. Yet, they are not without their drawbacks.

One well-known drawback is that hedge funds replicate indices and this means that if the index changes and drops a company from its membership while admitting another, ETFs become forced sellers of the dropped stocks and forced buyers of the newly included stocks.

This gives hedge funds an opportunity to front-run the ETF trades.

This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To read the full article, click here.

[This article originally appeared on ETF Stream.]