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There’s a bubble brewing in the ETF market
Over the last few decades, trillions of dollars have flowed into ETFs. Mostly because of their low fees, but also because ETFs are simple for beginner investors to understand.
This, however, has severely hampered price discovery. With more investors buying the whole index rather than individual stocks, certain assets have become mispriced.
The problem with this is that today many of these stocks are in danger of being severely overvalued and this is forming bubbles.
The biggest threat is to the illiquid stocks included in many ETFs. If the market crashes, these ETFs will become forced sellers of these illiquid stocks. This will intensify the crash and make things far things worse than they should be.
Now don’t get me wrong. I’m by no means bashing ETFs. I believe in ETFs. In fact, I hold several ETFs in my own portfolio.
But, the danger is, many beginner investors believe ETFs are the holy grail of investing.
They’ve been told passive investing is the one and only future and that active funds are a waste of time. But, as legendary short-seller Michael Burry pointed out this week, ETFs come with risks just like any other investment product.
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Hold onto your ETFs, but don’t forget the golden rule of investing
While it’s a good idea to have ETFs in your portfolio, the golden rule is to understand what you’re investing in.
Contrary to popular belief, most active fund managers are NOT incompetent. Many are extremely good at what they do. And, while they won’t beat the market every year, they often give you better risk adjusted returns than ETFs over the long-term.
Take the Rand Swiss Global Equity Fund, for example. As of the end of August 2019, the fund had given investors a USD return of 49.31% since inception. The MSCI World Index, on the other hand, has returned 29.97% over the same period.
So, while ETFs have their place in your portfolio, they certainly aren’t the holy grail that people have made them out to be. For true diversification, you need to spread your risk over ETFs, individual stocks, managed funds, structured products and more.
If you’re interested in discussing ETFs and the opportunities they create in more detail, you can join me at our free monthly workshop on 26 September 2019. This is a practical guide on ETFs, but we’ll also be looking at potential short-term opportunities Michael Burry style.
Rand Swiss, Wealth Manager