ETFs, Earnings Drift, and the Myth of Market Fairness
Every reporting season, we see the same pattern. A major company posts weaker-than-expected results, and its value plunges; the media quickly blames exchange-traded funds (ETFs) for the turmoil. The argument runs that passive investing has “broken” market discovery. It sounds neat, but it oversimplifies a complex reality.
Unfortunately, this is the case with this piece in The Age titled “Why Woollies share rice plunge is good news for everyday investors.” As my father was fond of saying, they have rather overegged the pudding on their conclusions.
Have ETFs Really Levelled the Playing Field?
There’s no question that ETFs have reshaped the investing landscape. Low-cost index funds have democratised diversification and tilted the odds in favour of everyday investors. Research indicates that the vast majority of active managers underperform their benchmarks once fees are taken into account (Fama & French, 2010). In this sense, the playing field has shifted — not in favour of the speculator, but the disciplined index-holder.
But to claim ETFs have made markets “fairer” is an overreach. ETFs themselves can distort outcomes. Large inflows and outflows, particularly around index rebalancing, create temporary misalignments in underlying stocks (Madhavan, 2016; Israeli, Lee & Sridharan, 2017).
The real winners are not small investors, but arbitrage desks and authorised participants who profit from ETF plumbing. ETFs haven’t abolished advantage; they’ve relocated it.
Post-Earnings Announcement Drift: A Survivor
The article also suggests that post-earnings announcement drift (PEAD) — the tendency for markets to continue moving in the direction of an earnings surprise — has been eliminated by faster flows. History disagrees. Since Ball & Brown (1968) and Bernard & Thomas (1989), PEAD has stood as one of the most robust anomalies in finance.
While the magnitude of drift has declined with the advent of high-frequency trading and the broader dissemination of data, it remains detectable even in modern markets (Hou, Xue, & Zhang, 2020). Drift hasn’t died; it has thinned. Traders can no longer expect substantial and obvious profits, but opportunities persist for those with patience and a systematic approach.
Information Asymmetry Has Not Left The Building
Perhaps the most problematic assertion is that information asymmetry “no longer exists.” Regulation Fair Disclosure (2000) ended selective analyst briefings, but new forms of asymmetry quickly filled the void. Algorithmic traders exploit microsecond advantages through exchange co-location. Hedge funds deploy satellite imagery to track retail car parks. Firms scrape credit card data to predict sales.
As Grossman and Stiglitz (1980) argued, perfectly efficient markets are impossible because, if they were, no one would bother to acquire information at all. Asymmetry is not abolished — it is reconfigured.
The Volatility of Earnings Season
Earnings announcements remain volatile events. Spikes in volume, spreads, and price swings are well-documented (Johnson & So, 2018;). But to argue that reporting seasons are becoming structurally more volatile is misleading. Volatility is episodic, driven by sector concentration and macroeconomic backdrop rather than any permanent shift. Tech firms with lofty valuations tend to swing more heavily, while defensive utilities do not. The pattern is not new.
The Real Story
ETFs are neither villains nor saviours. They have lowered costs, broadened access, and changed the rhythm of trading. However, they have not eliminated anomalies, addressed asymmetry, or achieved perfect fairness. To believe otherwise is to fall for a comforting myth.
Markets remain human at their core: prone to overreaction, slow to digest specific signals, and permanently uneven in their distribution of insight and speed. ETFs have changed the game — but they have not rewritten the rules.
