A Powerful Asset Class Bigger Than the Stock Market

Shah Gilani|September 5, 2025

A quiet revolution has been unfolding in the stock market…

As of August 2025, there are more U.S.-listed ETFs than individual stocks.

Around 4,300 ETFs now trade on U.S. exchanges, eclipsing the 4,200 listed companies. The basket has become bigger than the apples in it.

That’s huge. ETFs have multiplied from novelty vehicles into the majority of all listed investment vehicles in the U.S.

They’ve become investment fast food: everywhere, cheap, convenient, theme-driven, and barely leaving a trace – until now.

The ETF Demand Engine

Here’s what you need to know about ETFs…

They aren’t just baskets of stocks. They create demand for every stock inside them.

It’s called a “passive bid.” As more institutional and retail capital flows into ETFs, that demand ripples across every component stock, whether the companies of those stocks perform well or not.

Fund sponsors love momentum, so they keep stuffing the hottest names into new ETFs to juice performance and investor interest.

This creates a self-reinforcing cycle. More momentum stocks lead to hotter ETF performance… which attracts more inflows… which drives demand for more momentum stocks.

Rinse and repeat.

It’s classic herd behavior, but at fund factory scale. The act of flooding cash into ETFs becomes a price driver, and momentum becomes the force that rules markets.

Here’s the problem…

When the market wobbles and dips appear, the passive bid kicks in again. ETFs – especially broad-based index funds like SPY and QQQ – act as floor buyers.

This makes “buying the dip” look like common sense, again and again.

Until it doesn’t.

When Passive Turns Predatory

Behind any ETF’s smooth operation is a crucial middleman system run by authorized participants (APs).

Think of APs as the exclusive dealers – big banks and trading firms like Citadel and Jane Street – who have special permission to make and destroy ETF shares.

Here’s how the system works normally…

APs keep ETF prices honest through a simple trade. When an ETF costs more than its underlying stocks are worth, APs buy those stocks, package them into new ETF shares, and sell the ETF at the higher price.

When an ETF trades below its true value, APs buy the cheap ETF shares and swap them for the more valuable underlying stocks.

This back-and-forth keeps ETF prices glued to their Net Asset Value (NAV) – the actual worth of all stocks inside the fund. It’s the magic that makes ETFs work.

But here’s where things get dangerous…

When markets crash, this same system can turn vicious.

As investors panic-sell ETFs, APs must unload the underlying stocks. But APs often short those stocks before they even finish the unwinding process, betting prices will fall further.

Picture the domino effect…

1. Market drops, investors dump ETF shares.
2. APs start breaking apart ETFs to return the underlying stocks.
3. APs short those same stocks, anticipating more ETF selling ahead.
4. Short-selling drives stock prices down further.
5. Lower stock prices make ETF values fall more.
6. Falling ETF prices trigger more investor selling.
7. The cycle accelerates.

What started as normal market mechanics becomes a death spiral. APs profit by shorting stocks they know they’ll need to sell anyway, but this amplifies the crash.

The “passive bid” that usually supports prices flips into a “passive bleed.” Instead of ETFs cushioning market falls, they accelerate them.

Buying the dip stops working when the dip becomes a cliff.

Who Are These Authorized Participants Anyway?

Here’s the key point: Authorized participants aren’t ETF sponsor employees.

Their incentives aren’t altruistic. They profit through arbitrage, not by supporting investors. They have no legal obligation to provide liquidity or execute redemptions or creations.

Their participation is purely discretionary and profit-driven.

In a crisis scenario, APs can – and likely will – step back. No creations, no redemptions, just enough activity to let ETF price-NAV gaps widen while everyone scrambles.

That’s when liquidity evaporates, and the system’s fragile skeleton shows.

The Smart Move (For Now)

Here’s your takeaway…

Yes, ETFs now outnumber stocks. Their passive buying – especially when leveraged into momentum strategies – has become a powerful force pushing markets higher, making buying dips a compelling strategy.

Until the system breaks.

As long as APs maintain the arbitrage machine and investors chase ETF momentum, the passive bid stays robust.

But when cracks appear – liquidity wanes, redemptions accelerate, APs prioritize their own survival – this passive bid can morph into a dangerous feedback loop.

You’re only as safe as the underlying architecture permits, and right now, that architecture is more fragile than popular wisdom suggests.

Trade smart… and watch any ETFs you may own in your portfolio. Make sure your profits are protected… and be ready to act if things turn south.