Vanguard’s CEO, Bill McNabb, seems perturbed by the claim that increased ETF inflows are creating a stock market bubble.
The head of the 4.5 trln usd asset management house argues that index traded funds – such as exchange traded funds – represent less than 15 pct of equity market capitalisation around the world, and account for less than 5 pct of daily trading volumes.
He also argues there is no data to substantiate the fear of an equity bubble due to increased ETF inflows, and the observations certainly seem to be based on scant evidence. What, however, may have precipitated the speculation are moves by regulators to instigate a review – on a global stage – of the potential risks of explosive growth in the low cost ETF industry.
Approximately 4 trln usd of index tracking funds are invested in ETFs globally and the sector has attracted almost 2.8 trln usd in new business since 2008; in addition, investors have ploughed nearly 400 bln usd into ETFs during the first seven months of 2017, according to London based consultancy, ETFGI.
An investment shift to ETFs in the US has been particularly strong, with assets reaching almost 2.8 trln usd at the end of March compared to 16.9 trln in mutual funds, versus 2.1 trln usd and 15.7 trln usd respectively a year earlier.
Vanguard is one of the major ETF players globally, along with BlackRock and State Street. Vanguard recently hit a record 800 bln usd in ETF business, and business generated by the three stalwarts together amounts to over 70 pct of the global market, according ETFGI.
Active managers, hedge funds and high frequency traders dominate trading, McNabb said. But passive funds are also keen to grab a slice of the cake for themselves, garnering concern among advisors such as Steve Bregman, co-founder of Horizon Kinetics; he views a shift toward passive investing as the catalyst for the growth of a significant stock market bubble.