No ETF bubble

Monday, August 14, 2017 // Written by Enzio von Pfeil

The press is agonising about this.  We question why.

  1. Bubble trouble. For some months we have voiced concerns about a  stock market crash within the next six months: banks' roping-around with flogging bundles of toxic collateralized loan obligations (CLOs) are very much behind our fears.
  2. ETF purchases not a reason to panic.  But in today's otherwise astute Financial Times (FT) we read that "Surging inflows into exchange traded funds drive US stocks' bubble anxiety".  No reasons to worry that ETF inflows themselves can cause a crash.  First, it seems as if most ETF investment is coming from investors angered by the under-performance of their expensive, actively - managed funds. So there is lots of switching going on - from active funds  to passive ETFs.   So there is simply a re-allocation of assets within an investor's stock portfolio going on - not much by way of net additions. The asset pie of 100 remains the same; it's just that the content mix has switched.  And secondly, the money going into ETFs on the whole is not leveraged. Instead, people are buying $100 worth of ETFs by converting mainly from their existing active funds (see above) or from spare cash. 
  3. investment implication.  May as well keep buying on dips in the market. The Economic Clock® ticks steadily...

Share this post: