ETF's: The most crowded trade in history

Nigel Littlewood & Jackson Lee

Harness Asset Management

While we are close to driverless cars but not quite there yet… we appear to be embracing 'driverless investing; with abandon. Indeed as Steve Bregman points out in this great presentation, the money flowing into index style funds that invest with no regard whatsoever to value, has created the “most crowded trade in the history of investing. (VIEW LINK)

I generally like being liked, but telling people to stop partying because things are getting dangerous, never makes you popular - but I find myself in that position. The boom that has been created by the massive flow of indiscriminate buying (via ETFs) will end badly at some point, yet equally it is providing value opportunities on the other side of the ETF divide.

Stocks that sit outside the ETF universe are being shunned and sold. Institutional investors are being punished for higher fees (than ETFs) and perhaps some short-term underperformance (to an artificial index) and this is leading to active selling of Ex-index stocks, which of course, is creating value. I can’t predict when this will end but end it will and the argument for saving a few basis points a year in fees at the expense of sensible active management will look stupid when this crowded trade starts to reverse.

The large Australian managed super funds that are flocking to driverless investing might just be making the biggest investment mistake of all time. As an example of how far this boom is extending, below is an article about a new AntiGay ETF. We live in interesting/weird times:  (VIEW LINK)


As an active value fund manager there is always the risk that I am highly biased in my view and suffering from confirmation bias to support my process and business model. I welcome opposing views but I just can’t see how this boom ends well for investors…eventually.


Value investing is the opposite to indiscriminate buying as described above via ETFs. I remain convinced that the best returns over time will be provided by buying assets cheap and preferencing those with growth attributes while exercising extreme discrimination (not the type that the anti gay ETF might espouse).

Nigel Littlewood & Jackson Lee
Nigel Littlewood & Jackson Lee
Harness Asset Management

Nigel has been an investor, advisor, newsletter publisher and fund manager in the Australian Stockmarket since 1986

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