Quite a few people seem to?dislike?a column I wrote earlier this week?on exchange-traded funds and their role in the emerging market sell-off. So let me offer a little extra data that was not in the earlier piece.

The following chart, compiled from Strategic Insight Simfund data, shows total inflows and outflows from US investors to emerging market equity funds of three types: active funds, indexed open-ended funds, and indexed ETFs. Figures are in billions of dollars. Starting in 2009, when emerging markets began their rebound, and going through to the final quarter of last year, I believe the story it tells could not be much clearer: ETF money is flighty.



Money in ETFs is far more volatile and far more prone to exit in a hurry than money invested in emerging markets through other vehicles. As EM investing is supposed to be a game for the long term, this is a problem.

Why is ETF investing so volatile? A crucial advantage of ETFs is that they can be traded throughout the day. Holding them is very cheap for those who already have brokerage accounts. So it may not be that the ETF structure has actively encouraged people to be more on a hair-trigger when they invest in EM. Perhaps it is merely that anybody who wants to trade in and out of EM as an asset class will naturally choose to do so through ETFs, now that that is an option.

Flows into active funds, surprisingly robust, tend to be far more patient. As much of the EM action over these years has tended to be in smaller companies underrepresented by the main indices, investors in active funds are presumably content with their performance. Non-ETF passive money, a much smaller share of the total, appears to be considerably more patient than ETF money.

Generally, Avi Nachmany of Strategic Insight suggests that ETFs are mostly held by institutions, while retail money is still dominated by actively managed mutual funds. As money pours in to active funds, many will have a problem with capacity; larger size is a problem for an open-ended active fund.

So it is just about possible to argue that the remarkable outflows through ETFs represent money that would have exited swiftly anyway. Maybe,institutions, as well as hedge funds, treat emerging markets as an opportunistic asset classto be traded rapidly, and are merely looking for the cheapest way to do it.

But it is still worth having a conversation about this. The data is also consistent with the notion that ETFs by their structure encourage excessive trading and volatility ? and of course in relatively small emerging markets, big in- and out-flows can have significant real economic effects. This is exactly the problem of which?Vanguard?s Jack Bogle warned, back in 2007, when the ETF phenomenon was becoming established. The investment community needs to debate this.