In the wake of the global financial crisis (GFC), index ETFs were meant to offer risk-averse investors a safe and easy way to gain diversification. But nine years into the global market’s bull run, they appear to be pushing US tech stocks into unrealistic valuations in ways that may end badly for many.
In late 2018, we are at a fork in the road where investors may want to reconsider their strategies. The trillions of dollars flowing into ETFs peaked in March and we’re starting to see tech stocks return to earth. The FAANG stocks, which include the likes of Amazon, Facebook and Google, lost US$172.7 billion in value on 10 October alone.
This paper discusses our view that ETFs are a bubble that are in turn a transmission mechanism for a tech stock bubble. And that many investors in ETFs that follow indexes are as exposed as those who bought into collateralised debt obligations before the GFC.
It also discusses the opposing regulatory and consumer forces that might pop the bubble, especially among tech stocks, and open up buying opportunities.