Bank of America rang a warning bell Wednesday regarding all the money that has piled into passive exchange-traded funds.
The bank says the massive popularity of ETFs may be leading us on a road to a liquidity problem. The note issued by Bank of America Merrill Lynch's Global Research department warns "the actual shares available, or true float for S&P 500 stocks, may be grossly overestimated."
That could lead stocks and the overall market to fluctuate more violently, especially to the downside, due to a future event affecting either a single stock, a sector or the market at large.
Passively managed ETFs have become incredibly attractive to investors, allowing them to pick and choose baskets of stocks representing different parts of the market. According to industry groups, more than $4 trillion is now invested in ETFs.
Vanguard is the second-biggest issuer of ETFs, and it now has at least a 5 percent stake in 491 out of the stocks in the S&P 500, according to the report. That's a massive increase from a 5 percent stake in 116 stocks out of the S&P 500 it held in 2010, illustrating the massive growth of the ETF industry.