LONDON (Reuters) – Is this prediction of speculative market bubbles just speculative among amateur traders or is close institutional money blowing large areas of interconnected and inevitable soaps exploding each other?
Both features certainly play as a saving balloon amid strong support from the government and the central bank for limited numbers at the time of the pandemic.
Over-caffeinated day traders with whizzy new stock market apps and punting from bedrooms during lockouts have been largely to blame for some single stock pressure blows in the past six months.
The parabolic price hikes include boots that seem unrelated to anything from a Tesla carmaker to a Bitcoin cryptocurrency, Big Tech ‘dissenters’ or net profit internet startups.
There is little doubt that the combination of pandemics, workloads, wind savings and low – cost trading platforms will speak strongly for the phenomenon.
But the hustle and bustle around some active themed funds in place of the Mushroom Traded Trade Fund is just as enticing and perhaps raises big questions about imminent risk.
The first obvious point is the ballooning of the ETF world since the last major crash – since they were just small players in the Big Financial Crisis of 2008. The number of ETFs seized by Lipper’s fund administrator has increased. rising almost fivefold from 2009 to some 5,582 worldwide last year – with combined assets of nearly $ 6 trillion compared to less than $ 900 billion 11 years ago.
Refinitiv data shows the combined ETF and broader share of Exchange Traded Products topped $ 7 trillion last year – about 8% of total global equity market capitalization.
And to the extent that ETFs have traditionally been passive index fans, growth in the sector over the years has become quite unusual. Their attraction comes largely from their park as low-cost vehicles moving savings and 401 (k) pension money into a wide range of complex and worry-only care on a busier end. the executive regulatory industry.
Moreover, fears of potential crashes with daily exchange rates and underlying asset prices and an appropriate cash balance during market pressures have long been largely unfounded so far during the current market movements. last ten years.
But as the years went on and almost every index on the planet was under the umbrella of multiple ETFs, questions about trading strategies and new ideas were met with the answer: “There is an ETF for that ”.
Far from simple and passive index fans, a slew of thematic and average ETFs have emerged – raising higher fees for better performance or demanded by professional investors for hedge purposes.
A report by Citi this week shows that topical ETFs came into their own last year, with a $ 57 billion increase in streams bringing total funding to about $ 140 billion, and it was of the thought that this growth was “still at an early stage”.
And perhaps unsurprisingly, with continued technical success and locksmiths, it shows that “disruptive innovators” and “clean energy” assets have driven the movement and that is where there is congestion. of inflows and new assets.
For some analysts, the swell of these types of currencies goes a long way to explaining recent market movements and sometimes relative correlations hitting the headlines – and that could cause headaches if only one part of them would go against that.
For graphics on thematic disrupter ETFs capturing and driving mobile stock:
For a graphic of ARK’s Total Net Fund in Innovation ETF:
TWO BY TWO
For example, four of the top 10 non-moving ETFs have been achieved over the past year as thematic funds managed by ARK Invest – with the well-known Ark Innovation and Ark Next Generation Internet generating returns year on year between 750-850%. Managed funds have hit more than $ 24 billion and $ 6 billion respectively, compared to less than $ 2 billion and $ 500 million each just a year ago.
The contents of these funds are more interesting. Unlike many broader index tractors, they are based in just over 50 stocks, with Tesla making up about 10% in each and the next generation internet ETF also taking its own. crypto-investor Grayscale Bitcoin Trust entered as the fifth largest holder along with the likes of Roku TV streaming company and online health company Teladoc.
Citing a recent study in Barron’s magazine examining problems for open ETFs as ARK’s potential limits in highly illicit stocks due to massive inflows, Saxo Bank strategist Peter Garnry a warning about spilling over in any sharp turn in his holdings.
“We are basically issuing the warning that this interconnection of jobs could be driving each other and being at the center of the next correction in growth equities,” he wrote. “Our view is that selling in Bitcoin can lead to misconduct among investors with Tesla-Bitcoin-Ark positions and suddenly a terrible sell-off has begun”.
Whether themed ETFs tend to build relatively small stocks that have raised sharp prices and these in turn attract waves of performance-oriented inflows. away which just blows bubbles in the process.
Citi notes this problem. “Are we aware of a ‘first come, first served’ legacy, theme or price action? ‘
And on top of that, recent studies aren’t kind.
An academic paper by Itzhak Ben-David, Francesco Franzoni, Byungwook Kim and Rabih Moussawi published by the National Bureau of Economic Research this week examined ETFs over the 20 years before the pandemic and concluded that what they cite ‘specialty’ ETFs performing poorly.
“These ETFs tend to hold attention-grabbing and overvalued stocks and therefore perform highly. They deliver a negative alpha of around −4% per year, ”he said, adding that underperformance persists for at least five years after launch – usually the highest interesting around the topic of investment.
It may be different from the pandemic.
(The author is the editor-in-chief of finance and markets for Reuters News. The views expressed here are his own)
by Mike Dolan, Twitter: @reutersMikeD; Edited by Steve Orlofsky