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Friday, April 06, 2018

Dimon Shares Some Index Fund and ETF Worries

News summary by MFWire's editors

The chief of one of the largest banks in the world has passive funds on the mind, at least a bit.

Yesterday in his 33-page annual letter to shareholders, J.P. Morgan Chase chairman and CEO Jamie Dimon mentioned index funds and ETFs three times. It appears that Dimon shares some of the concerns that some fundsters have voiced about what happens to passive funds in a bear market, though he also sees passive funds as an opportunity for his firm.

On the second point, in the "Business Strategies" section of the letter, sub-section 1, "How has the company grown?", Dimon offers only one update about J.P. Morgan Asset Management (JPMAM [profile]). He writes that the asset manager is "adding new products, like index funds and exchange-traded funds (ETFs), that we believe will help drive growth."

As for market worries, later on in the Business Strategies section, under sub-section 6, "What risks worry us the most? And what could go wrong?", Dimon highlights seven "modest negatives or potentially importance differences" between now and the financial crisis of nine years ago. The first of those negatives mentioned aims squarely at passive funds and how well they'll weather a bear market:
Far more money than before (about $9 trillion of assets, which represents about 30% of total mutual fund long-term assets) is managed passively in index funds or ETFs (both of which are very easy to get out of). Some of these funds provide far more liquidity to the customer than the underlying assets in the fund, and it is reasonable to worry about what would happen if these funds went into large liquidation.

For the final ETF mention, Dimon lists index funds and ETFs among the "multiple actors in the system" (as well as "insurance companies, banks and nonbanks") that might individually "stop providing credit and liquidity in the marketplace" during the next crisis.

"We need to do a better job of understanding how this might unfold," Dimon writes, pointing to both regulators and banks. 

Edited by: Neil Anderson, Managing Editor

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