Peak popularity for ETFs?

LiveWire11-20

If you don’t know who you are, this is an expensive place to find out. Adam Smith, The Money Game The Money Game remains one of my favourite all-time investment books. Both funny and wise, it was ...

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Some of his early investors sold in a panic at the lows.Think of it like a ","collect":0,"end_time":0,"defaultTopTitle":"livewiremarkets.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"LU2168564065.EUR":"AZ ALLOCATION - TREND \"AAZ\" (EUR) ACC","LU1280957306.USD":"THREADNEEDLE (LUX) US CONTRARIAN CORE EQUITIES \"AUP\" (USD) INC","BK4176":"多领域控股","IE00B775SV38.USD":"NEUBERGER BERMAN US MULTICAP OPPORTUNITIES \"A\" (USD) ACC","LU0648001328.SGD":"Natixis Harris Associates US Equity RA SGD","IE00BKDWB100.SGD":"PINEBRIDGE US LARGE CAP RESEARCH ENHANCED \"A5H\" (SGDHDG) ACC","IE00B1BXHZ80.USD":"Legg Mason ClearBridge - US Appreciation A Acc USD","LU2168563687.JPY":"AZ ALLOCATION - TREND \"AAZ\" (JPYHDG) ACC","LU0234572021.USD":"高盛美国核心股票组合Acc","IE000M9KFDE8.USD":"NEUBERGER BERMAN US LARGE CAP VALUE \"A\" (USD) ACC","LU2168564149.EUR":"AZ ALLOCATION - TREND \"BAZ\" (EUR) ACC","LU0053666078.USD":"摩根大通基金-美国股票A（离岸）美元","LU1074936037.SGD":"JPMorgan Funds - US Value A (acc) SGD","CAPE":"Shiller CAPE U.S. Equities ETF","LU0048573561.USD":"FIDELITY AMERICA \"A\" (USD) INC","LU0251142724.SGD":"Fidelity America A-SGD","LU1363072403.SGD":"Fidelity Global Financial Services A-ACC-SGD","LU0251131958.USD":"FIDELITY AMERICA \"A\" (USD) ACC","XKO.AU":"标普/澳交所 300指数","LU1366333091.USD":"FIDELITY GLOBAL FOCUS \"A\" (USD) ACC","BK4588":"碎股","SKIS":"Peak Resorts, Inc.","BK4533":"AQR资本管理(全球第二大对冲基金)","XAO.AU":"标普/澳交所 普通股指数","IE00BWXC8680.SGD":"PINEBRIDGE US LARGE CAP RESEARCH ENHANCED \"A5\" (SGD) ACC","BK4550":"红杉资本持仓","LU1571399168.USD":"ALLSPRING GLOBAL LONG/SHORT EQUITY \"IP\" (USD) ACC","LU0683600562.USD":"AB SELECT US EQUITY \"A\" (USD) ACC","IE00BJLML261.HKD":"HSBC GLOBAL EQUITY INDEX \"HCH\" (HKD) ACC","LU2487616109.SGD":"JPM AMERICA EQUITY \"A\" (SGD) ACC","LU0157215616.USD":"FIDELITY GLOBAL FOCUS \"A\" INC","LU1914381329.SGD":"Allianz Best Styles Global Equity Cl ET Acc H2-SGD","LU0210528500.USD":"JPM AMERICA EQUITY \"A\" ACC","BK4581":"高盛持仓","XJO.AU":"标普/澳交所 200指数","FDN":"First Trust Dow Jones Internet I","LU0154236417.USD":"BGF US FLEXIBLE EQUITY \"A2\" ACC","BRK.A":"伯克希尔","LU1201861249.SGD":"Natixis Harris Associates US Equity PA SGD-H","LU0256863811.USD":"ALLIANZ US EQUITY \"A\" INC","IE00BK4W5M84.HKD":"HSBC GLOBAL FUNDS ICAV US EQUITY INDEX \"HC\" (HKD) ACC","BK4534":"瑞士信贷持仓","LU0130102774.USD":"Natixis Harris Associates US Equity RA USD","LU2168564222.USD":"AZ ALLOCATION - TREND \"AAZ\" (USDHDG) ACC","LU0640476718.USD":"THREADNEEDLE (LUX) US CONTRARIAN CORE EQ \"AU\" (USD) ACC","IE00B1XK9C88.USD":"PINEBRIDGE US LARGE CAP RESEARCH ENHANCED \"A\" (USD) ACC","LU0742534661.SGD":"Fidelity America A-SGD (hedged)","BK4585":"ETF&股票定投概念","LU0980610538.SGD":"Natixis Harris Associates US Equity RA SGD-H"},"translate_title":"ETF受欢迎程度达到顶峰？","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"FDN":0.9,"XJO.AU":0.73,"SKIS":1.5,"XAO.AU":0.73,"XKO.AU":0.73,"BRK.A":0.9,"CAPE":1},"content_text":"If you don’t know who you are, this is an expensive place to find out.\nAdam Smith, The Money Game\nThe Money Game remains one of my favourite all-time investment books. \nBoth funny and wise, it was published during the first great tech boom, in 1967. \nThis was a few years before Buffett decided to close his early partnerships due to a lack of value opportunities. Instead, he decided to focus on fixing a woeful investment he had made a few years earlier called Berkshire Hathaway. \nThe Vietnam War was in full swing. The civil rights movement was upending post-war America, culminating in the assassination of Martin Luther King in 1968. \nThey were ‘unprecedented times’, yet the market ripped higher, peaking in December 1968.  \nDuring the 1960s boom, middle-class America became investors for the first time via an explosion of mutual funds (a bit like ETFs now), which made investing in the stock market easier. \nPortfolio managers (called gunslingers) became rock stars. \nEveryone got rich from the boom. The relatively modest performance of the Dow Jones Industrials belied the rampant speculation that went on beneath the surface. \nThen, just as the masses piled in, came the 1970s…\nA decade of going nowhere. \nEven Berkshire Hathaway struggled. After Buffett closed his partnerships in early 1970, partners had the option of buying into Berkshire at around $40 per share or seeking alternative investments. \nBy 1975, Berkshire was back around $40, after rising to nearly $100. Some of his early investors sold in a panic at the lows. \nIt was a tough time. New York City was bankrupt. Inflation was rampant and crime was rife. \nAll this is to remind you that what comes next is usually different to what came before. \nThe future is uncertain. We don’t know what tomorrow brings. And if you don’t know who you are (and what you’re doing, I might add), the stock market is an expensive place to find out. \nSometimes the market reflects this inherent uncertainty, like during the tough times of the 1970s, or after the GFC. \nAnd sometimes it doesn’t, like the late 60s, 1999/2000, and now. \nRecently, the S&P500 cyclically adjusted price-earnings ratio (CAPE) moved above 40. It’s the first time it’s breached this level since 1999 and only the second time in history to do so. \nWhile we only have one data point, in the 10 years following the S&P500 peak in March 2000, the index lost on average 2.65% per year. Throw in annual average dividends of around 1.75% and the index still went backwards. \nAdd in inflation, and in real terms, passive investors suffered even more. \nThis is why I have concerns for the long-term, buy-and-hold passive investor, just as the strategy reaches peak popularity. \nThe iron law of the market is that whatever has been successful in the past tends to become popular. And whatever is popular tends to perform poorly in the future. \nAs to why, it all boils down to price. \nThink of it like a see-saw. When prices are low, history tells you future potential returns are high. But when prices are high (like now), future potential returns are low. \nThe higher that prices become in the short term, relative to long-term earnings trends, the poorer future returns will be. \nWith the CAPE ratio above 40, passive index investors (in the US) are looking at long-term future returns that are very likely to be negative.  \nIn fact, based on the ‘what’s popular no longer works’ theory, I think passive investors everywhere are likely to experience poor long-term performance. \nNot all ETFs are passive funds, I know. But investors think of ETFs as diversified and ‘easy’, and that they will continue to deliver. \nGiven the strong performance of most global indices, and the poor performance and high relative fees of many index-hugging ‘active’ fund managers, ETFs are now wildly popular. \nThe latest Betashares Australian ETF Review for October, published on the 13 November, showed a record month of inflows at $5.99 billion. The Australian ETF industry reached a new record high of $321.7 billion in funds under management– a 4% monthly increase. \nOver the last 12 months the Australian ETF industry grew by 38.4%, or $89.2 billion. \nYou can see the popularity of the sector in the chart below. It looks like the NASDAQ in 1999!\n\n\n\n\n\n\n\n\n\nSource: Betashares\nSix of the top seven ETFs in Australia by market cap are all index ETFs (see below).\n\n\n\n\n\n\n\n\n\nSource: Betashares\nTo be clear, I think low-cost index ETF’s are excellent investment options for people who don’t have the inclination to watch their investments closely or the skill to make the right investments. \nDollar cost averaging through the cycle is the best way to invest, rather than rushing in during the height of popularity, as many seem to be doing now. \nIn what is perhaps an ominous sign, Betashares launched a new ETF in September called the Betashares Wealth Builder Global Shares Geared (30-40% LVR) Complex ETF. \nThat’s just what investors need at this stage of the bull market!  \nSometime in the future, after a few years of poor performance, many people are going to think, ‘maybe these passive ETFs aren’t what I thought they’d be. Nobody told me they might go nowhere for years.’\nSome might even panic and sell out at the lows. \nTowards the end of The Money Game, the narrator talks to his friend, known only as ‘The Gnome of Zurich’. \n“One day in Spring, or maybe not in Spring, it will either be raining or it won’t”, said the Gnome of Zurich. “The market will be hubbling and bubbling, there will be peace overtures in the air, housing starts will be up, and all the customers’ men will be watching the tape and dialing their customers as fast as they can. On Wednesday the market will run out of steam, and on Thursday it will weaken. Profit-taking, profit-taking, the savants will say. Do not listen. Call me.”\nWhether we are at a ‘call me’ time in the market right now, nobody knows. \nI certainly don’t. \nBut I do know that when themes/stocks/sectors are excessively popular (hello AI), they become expensive, and then perform poorly for years. \nInvestors ploughing into ETFs thinking it’s a cheap and easy way to invest will learn this lesson in the years ahead. \nIf they are genuine long-term investors with a disciplined dollar cost average strategy, this won’t be a problem. \nBut if they are simply chasing performance and following the herd…well…as Adam Smith said, ‘if you don’t know who you are, this is an expensive place to find out.’\nWant more like this? \nEnjoy unfiltered investment analysis? That's just a taste of the daily insights at Fat Tail Daily, covering everything from tech to miners to economic trends. \nExpand your perspective - subscribe for free here.\n\n\n\nNever miss an update\n\n    Enjoy this wire? 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