Influence of the growing ETF industry on active investor relations work34 Fundamentals of passive investments and ETFs Empirical studies have shown that indices which are primary dominated by ETF holdings lead to highly correlated stocks in the same index Dro betz 2020 7 10 Correlation means that share prices move in the same way and the risk of a certain inefficiency in the markets could develop and price discovery processes could be disrupted This occurring inefficiency cannot be exploited by arbitrageurs due to the high correlation between shares and indices Drobetz 2020 8 02 This correlation leads to increasing volatility in the markets which is reflected in sharp market movements and volatility spikes Furthermore information efficiency decreases because with a decreasing part of active investors less stock research is conducted as annual reports and mar ket rumors remain unnoticed by passive investors Meyer and Urbahn 2021 p 5 In addition the liquidity situation on the market is changed by passive investments This liquidity is increasingly concentrated on a few highly capital ized stock exchange companies and is shifting from the opening to the closing price Closing prices can thus be distorted as many ETF transactions are exe cuted at the closing auction in order to minimize tracking errors Meyer and Urbahn 2021 p 5 ETFs are often criticized for reducing competition Since their aim is not to maximize the value of each individual company but that of the entire index this investment strategy shakes the foundation of the market based system Drobetz 2020 13 32 However it should be considered that the idea of an efficient market would mean that it would be impossible to beat a 100 efficient market so that everyone would just invest passively This in turn would speak for the efficiency of passive investments Stevenson and Tuckwell 2019 p 29

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