ETF Bubble forming?
Exchange Traded Funds or ETF's for short have grown in the last 6 years from 580 Billion in 2008 to well over 1.3 Trillion today. Why?
The financial crisis of 2008 gave cause for hedge funds to reexamine ETF's as a way to bring value back to their portfolios since many mutual funds got hit hard and investors slowed and in some instances stopped sending money into the market. In 2008, there were only a handful of ETF's compared to today. Hedge funders went to great lengths to sell to the public ETF funding. They created ETF's with a lopsided mixture of growth verses momentum stocks. This would give credence as to high returns and would allow investors to invest in combination of stocks for better diversification of portfolios.
The idea worked. Many investors both domestic and overseas investors began piling back into the market with an astounding 110% rise in ETF funding creating our 5.5 year bull market.
Stocks in some ETF's grew 100's of percentage points whereas as an individual stock would not have accelerated as fast.
Now we have to look at the underlying problem ETF's bring to the market.
First, As stocks have grown together (not at the same pace but momentum)ETF's account for 65% percent of that growth. The problem with that type of fast growth is the unbalanced momentum to growth ratio stocks. As of now the balance of ETF's to individual stock buys are weighed heavily towards ETF's. This is where individual investors need to reexamine their exposure to growth verses momentum.
Second, ETF's are sector traded vehicles meaning I can trade in Bio tech as (IBB as one example) or tech, or financials etc. without committing to individual stocks in those sectors. While this is good as a diversification technique, sectors as a whole must be taken in context. The NASDAQ as a whole is affected by sector sell offs. As we seen in March the Emerging Markets sector ETF (EEM as an example) sold off causing a domino effect in the NASDAQ as a whole.
Some analyst are starting to see bubbles in ETF's. While bubbles are not new to the market, ETF bubbles are. Some see the ETF forming (or formed) bubble as dangerous as the 2000 crash. Why? because ETF's are a mixture of stocks and their exposure is higher than individual stocks themselves. This is where it is time to reexamine your portfolio as to ETF verses Individual stocks.
High momentum stocks such as AMZN, TSLA, NFLX, etc. are mixed with GOOG, AAPL, etc. The momentum to growth ratio is about 70-30, meaning that 70 percent of some ETF's are momentum stocks while 30 percent are growth stocks. On the surface this shows ETF's as a strong built house with high returns, whereas the foundation is weak.
Some will argue that the earning multiples that give rise to a crash are nowhere near where they were in 2000. While this true, we have to look at the ETF multiple as whole not individual stocks. Why? because we are in a new type of territory as where the old system of stock multiples and earnings is now not adequate enough to tell the whole story.
We use to look a individual stocks earnings and profit ratios to determine where the stock is headed, but today a great growth stock can now plummet due to being hitched to high multiple momentum stocks in ETF's.
In my opinion I do believe that ETF's will give rise to another crash in the next year or two once interest rates begin to climb and inflation rises over 2%. This is why companies are hoarding cash and funding their business with low interest bonds. Sound familiar?
Risking it all to obtain the reward, necessitates the motivation to succeed.
