January 23, 2022

Passive ETF Investing May Be The Next Market Bubble

A Massive Stock Market Crash in 2021? | A Deep Analysis ft. Warren Buffet

Passive ETF Investing May Be The Next Market BubblePassive ETF Investing May Be The Next Market Bubble

Investors are buying up Exchange Traded Funds (ETFs) that own the world’s most valuable stocks.

Investors are increasingly investing in ETFs such as SPDR S&P 500 and Invesco QQQ, which are heavily focused on a few technology companies. But can this really stop the massive user of the Robinhood platform??

Some experts are becoming increasingly nervous that Apple, Microsoft, Amazon, the owner of Google Alphabet and Facebook are the five largest stocks in S&P 500 – have become so strongly dominant.

Investors who are buying ETFs together because they see it as less risky than owning individual stocks can be disappointed.

«Outstanding performance by several large tech companies raises concerns about market concentration», – stated this month Mark Hackett, Head of Investment Research, Nationwide.

Hackett noted that the Nasdaq, which hosts many of the big tech companies, is now trading at the highest valuation (based on price and expected earnings for next year). This is reminiscent of how the dot-com bubble burst in 2000..

it «makes the market vulnerable to disruptions in the technology sector», – added Hackett. Investors may be forced to sell the best of ETFs if any of the leading tech companies start to get cheaper.

More actively managed funds operated by professional stock buyers such as Warren Buffett, usually own a more diversified portfolio of companies in their portfolios. This helps to avoid big losses when one particular sector starts to sink..

Market veterans – those who remember firsthand what it was like when the Nasdaq fell more than 50% from its 2000 peak in a matter of months – are beginning to darkly recall the events of twenty years ago.

«Obviously, there are many similarities between the dynamics of the market in the late 90s and its current dynamics. And those of us who have survived the bursting technology bubble are confused.», – said Tom Essey, Sevens Report Investment Newsletter Editor.

The skyrocketing rise in passive ETFs appears to be having an impact on other assets such as gold, potentially creating a bearish trend for the precious metal now that it has hit record highs..

Many investors gain access to gold through the popular SPDR Gold Shares ETF, as well as through other funds that own both commodities and gold stocks.

«Huge passive gold ETF holding can lead to a period of irrational exuberance», – considers Cam harvey, Partner and Senior Advisor at Research Affiliates and Professor of Finance at Duke School of Business&# 39; s Fuqua.

The passive investing boom is even driving up prices in the generally more stable bond market.

«We believe that prudent bond investors will need to rely much more on portfolios that can be both dynamic and active … as passive allocations seem to be more vulnerable to shocks than in previous years», – noted Daniel Janis, Senior Portfolio Manager at Manulife Investment Management, in his last month‘s report.

Janis added that the corporate bond market, in particular, is now much more risky, mainly because companies with weaker financials could go bankrupt due to debt, thanks to the policy of the Federal Reserve and other central banks around the world keeping rates so low.

«In part because of easy access to cheap finance, low-quality companies are becoming larger market segments», – Janis thinks. It could be bad news if there is a sudden wave of credit rating downgrades at riskier companies. Janis warns about «unattractive domino effect», as many bond funds will need to sell when things get worse.

«Forced sells will push prices down further, and as is often the case … lower prices will trigger waves of redemptions. Asset managers will be forced to raise cash to pay off – and the cycle will continue», – explained Janis.

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