Myth-Busting: ETFs Are Eating the World 

More like nibbling the world

January 2022. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • ETFs are a negligible owner of US stocks
  • Primary and secondary ETF trading has not grown quicker than total stock trading
  • The impact of ETFs on stocks is less strong than frequently suggested


“Software is eating the world.” The venture capitalist Marc Andreessen wrote these words back in 2011. From today’s perspective, with companies like Alphabet, Microsoft, and Meta dominating the stock markets, Andreessen’s observation seems to have held up.

Had BlackRock CEO Larry Fink made similar comments about exchange-traded funds (ETFs) 11 years ago, he likewise would look prescient today.

But despite its phenomenal growth over the last decade, not all is well in ETF land.

ETF skeptics are growing louder, their criticisms more pointed. Active managers — who are totally unbiased, by the way — believe passive investing is distorting the stock market. The efficiency of the capital markets may have increased amid greater integration of the global economy, they say, but now ETFs are skewing the pricing efficiency of single securities.

With these critiques in mind, what effect has passive investing, including ETFs and mutual funds that track indices, had on the US stock market?


ETFs are the most successful financial innovation of the last generation. As of 31 October 2021, more than 8,000 ETFs manage close to $10 trillion in global assets, according to ETFGI research. ETFs are not just core investment products for retail and professional investors but also for central banks. For example, the Bank of Japan has acquired majority ownership of Japanese ETFs through its quantitative easing (QE) program, which would have been unimaginable a few years ago.

Of course, there is no free lunch in the markets. The ETF industry’s success has come at the expense of actively managed mutual funds. Active funds have consistently lost market share to ETFs and indexed mutual funds. The trend is unlikely to slow or reverse anytime soon. The only question is what the ultimate ratio between active and passive will be. Conventional estimates anticipate passive products will capture at least two-thirds of the market.