ETF's: The most crowded trade in history

Nigel Littlewood & Jackson Lee

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).


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Jordan Eliseo

great read!

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Romano Sala Tenna

Fully concur Nigel; the 4 big banks represent nearly 1/3 of the ASX100 and a staggering 46% of the ASX20. That means that every ETF based on the ASX100 is pumping nearly 30c in every dollar into 4 banks, and worse for an ETF based on the ASX20. Investors are nervous about investing in the banks at this stage of the cycle, yet they willingly invest in some ETFs that are simply replicating this exposure.

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Sam Brindle

Nigel, ETF's aren't the problem, they're just a symptom of excessive management fees and poor performance. https://www.bloomberg.com/view/articles/2017-05-04/etfs-become-the-investing-world-s-no-1-scapegoat By definition ETF's don't set market prices, active managers do. If ETF's are funneling money into over valued stocks it's because investors have bid the price up to begin with. Taken as a whole active managers represent the market, if money is flowing from active to passive strategies it is unclear if this should have any effect on valuations.

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Christian Toime

Maybe it's time to start an non index ETF !

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