Those index funds meant to keep your money safe are actually the main reason a crash in one part of the market spreads to everything else.
March 23, 2026
Original Paper
Exchange-traded funds (ETFs) have become a dominant vehicle in equity investing, yet their growing scale also raises concerns about how shocks are transmitted across increasingly overlapping market segments
SSRN · 6448485
The Takeaway
While investors use ETFs to spread risk, the sheer scale of these funds means they now act as 'transmission wires' for contagion. During crises, the overlap in ETF holdings ensures that a shock in one specific sector is instantly broadcast to others, significantly reducing the diversification benefits when they are needed most.
From the abstract
This study examines the dynamic connectedness structure of 25 major U.S.-listed equity ETFs covering broad-market, growth, size, value/dividend, sector, international developed, and emerging-market exposures. Using daily data from February 2016 to February 2026, the analysis applies a time-varying connectedness framework based on an adaptive vector autoregressive specification and generalized forecast error variance decomposition. The empirical design is complemented by descriptive return diagno