Loading ...He mentioned the danger of “Passive Investing” in other words ETFs. It was predicted long ago that ETFs drive prices higher or lower that normal. Remember The late 2015 run up with Gold? $1,060 to near $1400 in six months? Because of GLD ETF? Gold run-up upper left 2016. Sometimes ETFs don’t do what they are supposed to. Remember that Nat Gas fiasco? I think Nat gas was up and the ETF went down. Often there are warnings about that stating use for daily or short term only.
https://finviz.com/futures_charts.ashx?t=METALS&p=m1
Story below:
The Hidden Index Bubble. As passive indexing grows, so do the risks — especially for the biggest stocks.
Investors around the world are flocking to passively managed funds. They do not trust that active funds — that is, stock-pickers — can get them better returns, especially after fees are accounted for.
The arguments for passive investing have been well-documented, and these investors are smart to listen to them. After all, even Warren Buffett promotes passive investing in low-cost index funds (perhaps the ultimate example of “do as I say, not as I do” in the investing world).
From 2009 to today, passive investing’s share of assets under management in U.S. funds has increased from about 20% to 40%. In dollar terms, the amounts are staggering. Vanguard, the standard-bearer of passive investing, collected an astonishing $1 billion for each day of 2017, with 90% of net inflows directed to passive funds.
Avoiding fees, tracking the market, and even the “set it and forget it” investing style have their merits, especially for individual investors. But when hordes of investors pursue the same endgame, what does it mean for the market?
Research has shown that the repercussions of such a profound shift could be dramatic — and even detrimental to long-term returns. Here’s why.
What “blind money” means
When active managers select stocks for a fund, they are essentially foraging for companies that will make good investments. If the stock market were a pumpkin patch, they’d be using the best pumpkin-picking strategy they know. This would be different from the strategies of other pumpkin-pickers, whose strategies in turn would be different from the next ones’. In other words, every fund manager has a unique approach to searching for the best investments available.
Passive investing is different. There is no manager. The money invested in a passive index fund is allocated to match the allocation of whichever index it tracks. That means passive investing is done “blindly”: Index funds simply imitate their indexes’ every move, with no input from professional stock-pickers.
The most well-known indexes are weighted based on the size — i.e., the market capitalization — of the companies within. That includes the most commonly tracked index, the S&P 500, which is essentially a collection of the 500 largest publicly traded U.S. companies as measured by market cap (some exceptions apply). The largest companies, then, receive the most investment when money flows into passive investments.
That money acts like water on the pumpkin patch. Every time money flows from active to passive management, it’s as though water is flowing to the biggest pumpkins (i.e., holdings) by virtue of their size. And then, as a consequence of the new money, the big get bigger.
If this sounds peculiar, or even illogical, that’s because it is. But it’s how passive indexing works, and it’s happening because investors have grown weary of the alternative: Active management often comes with over sized fees and under performance.
The distorting power of passive investing
Passive indexing, then, is in vogue in recent years. Its increasing popularity adds incrementally to the market caps of all companies in the index — but even more so to the largest ones. And this compounds over time. Ultimately, it can create distortions that will have consequences for investors.
Some of the most relevant research on this topic was published earlier this year by the investment advisor Semper Augustus. While most investors were rejoicing in the performance of indexes during 2017, Semper Augustus looked under the hood to see what was really happening. What the firm found is remarkable.
First off, the big are definitely getting bigger. In the case of the S&P 500, here’s a look at what percentage of the index is made up by the largest five, 10, and 25 companies, respectively:
Rest of story:
https://www.fool.com/amp/investing/2018/06/24/the-hidden-index-bubble.aspx