ETF ownership in the Real Estate sector: systemic risk?

Exchange traded funds (ETFs) and quantitative investors account for about 60% of the equity space in the US (up from 30% 10 years ago) and only 10% of the daily volumes traded originates from fundamental discretionary trades. It will become increasingly difficult to generate alpha on a fundamental basis as individual stocks start to move in tandem and the relationship between fundamentals and share price has decreased. As a force to be reckoned with, we will try to take a closer look as to how these funds influence our day to day, starting with their current reach.

In the last 3 years alone, the European ETF sector saw €40bn net inflows. As a result, the average ownership of ETFs in the listed European real estate sector is about 4.5% of shares outstanding but many see ownership running into high single digits. However, with free float typically limited to about 75% on average, impact is in practice much higher.

Everything is fine, until…

When ETFs are selling, who will be buying? In case of (mass) withdrawals and/or sector rotation in the European real estate ETF space the consequences will be significant. Especially in Europe as free float and liquidity are typically limited. Many names in the listed real estate sector see ETFs holding over 20 days’ worth of trading with a few even over 30 days. Close enough to the definition of systemic risk?

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