Invest
Are we in a passive investment bubble?
Passive investment strategies such as ETFs have become a popular choice for many investors in recent years, but one fund manager is cautioning the world may be in the midst of a giant passive investing bubble.
Are we in a passive investment bubble?
Passive investment strategies such as ETFs have become a popular choice for many investors in recent years, but one fund manager is cautioning the world may be in the midst of a giant passive investing bubble.
Charlie Aitken, who manages the active AIM Global High Conviction Fund, says investing in a passive fund is “the very last thing” he wants to do in the current economic climate.
“You’ve got to remember where we are in the cycle,” Mr Aitken said.
“Markets have gone up for seven years and most fund managers have underperformed the market and that’s fair enough, we get that, and so people get sick of paying their fund managers, and think they can do it better themselves or listen to Warren Buffet and think they should just stick it in an index fund and that’ll be that from there.”
Mr Aitken says this could be a grave misstep, noting that markets are potentially approaching the end of “seven years of rising asset prices and an unprecedented era of low interest rates” and that the money flowing into passive products recently could be doing so at “exactly the wrong time”.
“History suggested that the biggest money flows exactly at the wrong time of the performance cycle – money chases performance – and we are probably right at the peak of performance right now,” he said.
“In reality, the time to buy passive products was seven years ago and quite frankly the lift you’ve had from the market since then has been almost unprecedented in history, but what we all seem to forget – and the passive community never reminds us of – is that passive strategies will also deliver exactly the fall of the market when it comes.”
Additionally, Mr Aitken said the way many ETFs distribute the money invested in them means companies whose market capitalisations (the price of all outstanding shares in that company) were already large benefitted the most.
“Buying an index which is weighted by current market capitalisation means today, in US equities, you are buying the most expensive group of stocks you could find in the last 17 years as measured by price-to-sale ratio. They could get more expensive, but that’s your starting point,” he said.
“You have to remember that price is what you pay and sale is what you get, or not. If record amounts are pouring into passive funds and ETFs, do you think you’re buying value? I don’t think so, and we’re betting against that. You’re buying the hope that someone pays more as interest rates are rising.”
Mr Aitken’s views are not shared by the other side of the industry, with Jon Howie from ETF provider BlackRock saying markets are “unequivocally, without a doubt” not in the midst of an ETF bubble.
“I think that represents fundamental lack of understanding about what’s actually going in investment markets overall and particularly in the ETF industry,” Mr Howie said.
According to Mr Howie, ETFs only represent around 6 or 7 per cent of the US stock market, and even less in other markets around the world.
“Even if every single investor in ETFs in the US piled in to stocks, you’re still only representing 7 per cent of the overall equity market, so you’re still not in a position where 7 per cent of the market can create an enormous bubble in asset classes,” he said.
BetaShares chief economist David Bassanese agreed with Mr Howie’s assessment.
“The idea that ETF investing has created a bubble in US valuations does not hold water as the S&P 500’s price-to-forward earnings premium to the word equities at end May was 11 per cent or only a little higher than its 8 per cent average premium since 2003,” Mr Bassanese said.
“Due to better growth prospects, US equities always trade at a premium.”
Mr Howie said rather than an ETF ‘bubble’, what Mr Aitken is describing is a fully-priced stock market.
“Macroeconomic data in the US has been relatively strong, and also the central bank in that market has been very, very accommodative in order to restart economic growth,” he said.
“You would expect valuations in that market to be reasonably high at this stage in the cycle, and it has absolutely nothing to do with ETFs.
“What’s important for investors is to try and cut through the noise and make an informed decision about which investments are going to be best for them, and then which ways of accessing those investments are going to be best for them. That’s the most important decision anyone can make.”
Do you think ETFs are in a bubble right now or are passive products the way forward? Let us know your thoughts below.
Mutual funds
Micro-investing: Is it worth it?
Investing can be complex. It involves making financial decisions on how your money is going to be invested and managed over time, as well as figuring out the right strategy for each investment. There...Read more
Mutual funds
RAIZ v Spaceship: Which is better value?
Raiz and Spaceship have become the two biggest apps in the micro-investing space, but which offers a better deal for Aussie investors looking for a hands-off savings strategy? ...Read more
Mutual funds
Sold your stocks during the dip last year? Here’s how much it might have cost you
If you cashed out during last year’s COVID-19 crash, here’s how much it might have cost you. ...Read more
Mutual funds
‘True to label’ warning again given to fund managers: ASIC
Consumers should be wary: Fund managers aren’t doing enough to ensure products are “true to label”, with a number of product names not aligning with underlying assets in those funds. ...Read more
Mutual funds
Move over, mainstream: ESG excels
Responsible investing is proving its worth in the investment game, beating out the total return of the S&P/ASX 300 over the last decade. ...Read more
Mutual funds
ASIC makes frozen funds easier to access
A new relief measure will enable investors suffering hardship to access their investment money even where managed funds have been “frozen” to maintain fund stability through the COVID-19 pandemic....Read more
Mutual funds
Is it time to put a food-style label on investment products?
Much like the food people eat, investors are being told they need to know what they are buying before purchasing exchange-traded products, as many are unaware of the ramifications if they don’t. ...Read more
Mutual funds
Why you should think about ESG investing this World Environment Day
Today marks World Environment Day, with experts using the occasion to flag how Aussies can benefit by investing in a way that helps the planet. ...Read more
Wrapping up an eventful 2021
Listen now
What Omicron means for property, and are units right for first-time buyers? What is equity crowdfunding? Are industry super funds tapping into member funds to save their skins?
Listen now
Will housing affordability improve in 2022? Will buy now, pay later become the norm? Why are Aussies staying in failing super products?
Listen now
Who really benefits from crypto ETFs? How will the RBA respond to rising inflation? Could a mandate help address unpaid super?
Listen now
Mutual funds
Micro-investing: Is it worth it?
Investing can be complex. It involves making financial decisions on how your money is going to be invested and managed over time, as well as figuring out the right strategy for each investment. There...Read more
Mutual funds
RAIZ v Spaceship: Which is better value?
Raiz and Spaceship have become the two biggest apps in the micro-investing space, but which offers a better deal for Aussie investors looking for a hands-off savings strategy? ...Read more
Mutual funds
Sold your stocks during the dip last year? Here’s how much it might have cost you
If you cashed out during last year’s COVID-19 crash, here’s how much it might have cost you. ...Read more
Mutual funds
‘True to label’ warning again given to fund managers: ASIC
Consumers should be wary: Fund managers aren’t doing enough to ensure products are “true to label”, with a number of product names not aligning with underlying assets in those funds. ...Read more
Mutual funds
Move over, mainstream: ESG excels
Responsible investing is proving its worth in the investment game, beating out the total return of the S&P/ASX 300 over the last decade. ...Read more
Mutual funds
ASIC makes frozen funds easier to access
A new relief measure will enable investors suffering hardship to access their investment money even where managed funds have been “frozen” to maintain fund stability through the COVID-19 pandemic....Read more
Mutual funds
Is it time to put a food-style label on investment products?
Much like the food people eat, investors are being told they need to know what they are buying before purchasing exchange-traded products, as many are unaware of the ramifications if they don’t. ...Read more
Mutual funds
Why you should think about ESG investing this World Environment Day
Today marks World Environment Day, with experts using the occasion to flag how Aussies can benefit by investing in a way that helps the planet. ...Read more
More articles
Website Notifications
Get notifications in real-time for staying up to date with content that matters to you.
