However, the main risk when trading ETFs is that if the index falls, then the portfolio will fall in the same way, or sometimes even more sharply with leveraged ETFs. And this can amplify market movements.

This is why the extent of ETF’s wider effect on the markets is often debated among analysts. More and more are blaming them when equity markets have sold off over the past decade. And the debate has resurfaced with the most recent market selloff in the fourth quarter of 2018. But a report from finance company First Trust flatly denies that they’re to blame: “If anything, the data points in the opposite direction”. It produced two interesting charts to back its view.
 

The bank points out that in the fourth quarter, US equity and sector ETFs had over $31 billion of net inflows, while traditional US equity and sector mutual funds had nearly $38 billion of net outflows in Q4. “If anyone was selling into a falling market, it was mutual fund investors!”, says First Trust, adding that “before anyone starts blaming the Q4 market decline on traditional mutual funds, keep in mind that this is nothing new. In fact, traditional equity mutual funds had net outflows for 8 of the prior 9 months in 2018, averaging over $11 billion per month.”

Its bottom line is that the evidence does not support the idea that ETFs meaningfully increased market volatility in Q4, nor that they steepened market declines. “On the contrary, in many cases, ETF investors were net buyers as the market declined, taking advantage of cheapening valuations.”