Exchange traded funds are attracting record inflows, but some investors are concerned the rapid growth is only fueling a stock market bubble as equities extend a bull rally.
However, Bill McNabb, head of Vanguard, refuted claims that ETFs are inflating a stock market bubble, arguing that index trackign funds, which includes the $4 trillion invested in ETFs, only represent less than 15% of the global equity market capitalization and less than 5% of daily trading volumes, reports Peter Smith for the Financial Times.
“I don’t see the bubble,” McNabb told FT. “The data belie the fears.”
Since 2008, the ETF industry has seen $2.8 trillion in new money flowing in – according to ETFGI, investors funneled almost $400 billion into ETFs over the first seven months of this year alone. With the huge growth in the ETF space, global regulators are increasingly scrutinizing the potential risks of the growth in the low-cost, index-based ETF space.
However, not everyone is convinced the sudden growth will have a huge negative impact on the global markets.
“I don’t think what is happening in ETFs is systemic,” McNabb said. “The concerns are more specific and idiosyncratic.”
Among the naysayers, Howard Marks, co-founder of Oaktree Capital, warned that it was unclear whether or not ETFs and index mutual funds would efficiently find buyers for their underlying securities in the event of a market crash.
McNabb also acknowledged these concerns, but he mostly directed them towards more thinly traded funds and those that contain leverage.
“I am more worried about ETFs that you don’t know what they mean,” McNabb said. “Leverage is one of those topics that average investors don’t understand the negatives [of].”
On the other hand, more liquid ETFs will have enough cushion to break the fall if the market crashes. In the event of a major sell-off, ETFs with more liquid markets will be able to meet large redemptions.
“The kinds of ETFs that we are going to support are going to be broad based and highly liquid. I don’t see the bubble issue,” McNabb said.
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