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The total market cap of all US domiciled companies is about $15.64 trillion. I'm using the US companies only because the # is easy to find.

Using these numbers as a rough proxy, then ETS's represent 1.18 / 15.64 or 7.5% of the total stock market. If any of my numbers make sense, how can ETF's drive correlation of the entire market? Or drive significantly? I can see how they would increase market correlation some, but not as much as the press seems to report.

Well, first, a large share of total market cap doesn't count. These shares are held for dividends, to maintain ownership/control, or as very-long-term investment, so they aren't in the market.

Another big chunk is held in index funds and while it trades in response to changes in the indices' makeup and in response to fund cash flows, a substantial portion of these shares also should be regarded as not being in the market. Some non-index funds also tend to not trade a lot, withdrawing more shares from the market.

And the ETFs themselves have a similar effect: the shares they hold are effectively withdrawn from the market and replaced with the ETF shares.

Share prices are determined via shares that are traded, not shares that are held.

According to the Census Bureau, total dollar volume of trading in US stocks and options (including option exercises and delivery on futures contracts) in 2010 was $64 trillion.

In August 2011, the one-month ETF volume was $2.9 trillion. That's $35 trillion a year. Out of $64 trillion.
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