February 10, 2016

Will ETFs crash hard?

This post relates to US markets - however over a period of time, this can happen in India also.

“Right now, hundreds of billions of dollars are being invested in the stock market by investors who don’t know anything about the companies they own.

“They buy exchange-traded funds [ETFs] – passively managed groups of stocks – that typically track the performance of a stock market index. These ETFs distort the market.

“Some well-known stocks are so heavily bought by ETFs that their prices are completely out of line with the real value of the company. And the ETFs are set up in such a way that there is no judgment at all involved.

“They are bought automatically, almost regardless of what is actually going on in the companies themselves.”

Chris believes that the opportunities for serious investors are increasing simply because there are so many unserious investors in the market.

ETFs favor the big companies in the big indexes, such as the S&P 500. That leaves the lesser known companies often unstudied and unbought.

“Even though stock prices are generally high,” said Chris, “there are many stocks that are actually cheap. You just have to look where the ETFs are not buying.”


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