Investors have defied expectations by continuing to put cash into Exchange Traded Funds (ETF) in October, despite a period of market turbulence.
Data from Bloomberg shows investors put a net €1.6bn (£1.4bn) into ETF products listed in Europe in the three weeks to 19 October.
This was despite their exposure to US equity mandates, which had seen market turbulence some believed would have sparked a sell-off.
The S&P 500 index of US shares fell from 2919 points to 2767 points during October, with the large technology companies, such as Facebook, being among the biggest fallers.
ETFs are passive investment products, most of which track an index. When an investor buys an ETF in most cases the capital is being deployed into the largest stocks in a particular market.
But in recent years ETFs have started to passively buy assets using other metrics and some have bought assets in less liquid asset classes.
The size of the ETF market can be seen in the €7.5bn (£6.6bn) of capital that was deployed into ETF products that buy emerging market bonds in the first 10 months of 2017, while €8bn (£7.1bn) was deployed into corporate bond ETFs.
David Scott, an adviser at Andrews Gwynne in Leeds, suggested an ETF sell-off could cause a liquidity problem because ETFs now representing such a sizeable part of the market.
He drew parallels with open-ended property funds which had to suspend redemptions in the immediate aftermath of the Brexit referendum, due to the length of time it takes to sell a property if investors are clambering to get their money out.
Mr Scott feels the natural stabiliser which is provided by active management is not there when passive investments become the biggest part of the market. This is because such funds have to sell when everyone is selling, and buy when everyone is buying.
Mr Scott said: "Since the last financial crisis trillions of dollars has been added to 'passive' equity strategies and $2trn has been withdrawn from 'active' investment strategies. This means more investors are free riding on the research of fewer investors. When sentiment turns, the passive crowd will find there are few buyers left in the market.
"The danger of this situation lies in the fact that active investors are the ones who prop up the market when it’s under stress. If markets are declining rapidly, the active investors see value and may step up to buy.
"If markets are soaring in a bubble fashion, active investors may take profits and step to the sidelines. Either way, it’s the active investors who act as a brake on runaway behaviour to the upside or downside."
Charles Plowden, joint managing partner at Baillie Gifford, has previously questioned whether investors fully understood the nature of the products they were invested in, warning about a systemic risk from ETFs.
But Adam Laird, head of ETF strategy for Europe at Lyxor said: "There is no evidence that ETFs are being used as short term trading vehicles.
"Liquidity is an issue for investors but it’s not a red alert. ETFs have held up in market volatility over the last 18 years and there’s been no issues in Europe.
"Look at the minicrash – investors might have presumed that a dip in US stocks would lead to a pullback from ETFs, but as the data from Bloomberg shows, this has not been the case."
David.thorpe@ft.com
