El-Erian: Investors are taking excessive risks
New York (CNN Business)With stocks enjoying a strong start to 2021, investors are continuing to plow more money into exchange-traded funds — especially ones that are tied to the top broader market indexes.
In other words, many investors are still happy to place their bets on the top techs that dominate the S&P 500 (SPX) — even though an army of active traders is investing in individual meme stocks like GameStop (GME) and AMC (AMC) as well as top cryptocurrencies bitcoin and ethereum.
Data from market analysis firm Finbold and research site ETF Database showed that the amount of assets in the ten largest ETFs has surged 47.6% (from about $1.1 trillion to nearly $1.7 trillion) since the market hit its Covid-19 fear induced low point in mid-March 2020 and the end of April 2021.
Three of the four biggest ETFs are passive S&P 500 funds from State Street’s (STT) SPDR family of funds, BlackRock’s (BLK) iShares and Vanguard.
That means that more investors are piling into the crowded trade for the FAANGs (Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX) and Google owner Alphabet (GOOGL)) as well as Microsoft (MSFT) and Tesla (TSLA). Those seven techs make up nearly 25% of the value of the entire S&P 500.
Six of the other top ten ETFs track other major market barometers like the Nasdaq 100 (QQQ) and various global and emerging market stock indexes. The remaining one is the iShares core bond ETF (AGG).
There’s more to the ETF world than the SPY and QQQ
But investors aren’t just buying broad market ETFs. Many are also scooping up niche sector funds, especially ones that have exposure to the burgeoning economic recovery as more people around the world get vaccinated for Covid-19.
For example, an ETF that tracks the price of dry bulk shipping prices has soared more than 250% this year as the global economy bounces back.
“As economies reopen, demand for goods increases and thus, demand for transportation increases,” said John Kartsonas, managing partner at Breakwave Advisors, which launched the BDRY fun (BDRY)along with ETF Managers Group.
“Logistical constraints are also aiding freight rates. Across the world, the pandemic left a logistical chain a mess,” he added. “Such trends tend to last months.”
There’s also a travel tech ETF that trades under the ticker symbol AWAY (AWAY) that has gained about 15% so far this year and has nearly doubled in the past 12 months. Top holdings include Expedia (EXPE), Booking (BKNG), Uber (UBER) and Airbnb.
The AWAY ETF, like many funds, is based on an index. So managers aren’t picking stocks for the fund per se. But not all ETFs out there are passively run. There is a growing demand for so-called active ETFs, where fund managers choose what to buy.
Active ETFs gaining ground on passive index funds
Fund management company Alger recently announced it is launching the Alger 35 ETF, a fund that will focus on 35 stocks that the company’s analysts think are the best ideas in the market. The ETF will mirror a similar mutual fund that the company has.
Top holdings include tech giants Amazon and Alphabet, but also a more diverse mix of stocks that includes US Foods (USFD), Shopify (SHOP), PayPal (PYPL), GE (GE) and aerospace equipment firm HEICO (HEI).
“We launched our first focused strategy in 2012 and have seen increased client demand and notable asset flows into the strategies since then,” said Alger CEO and chief investment officer Dan Chung in a press release.
And the ETF world could get an even bigger boost in the future if the Securities and Exchange Commission approves one (or more) of several proposals by large fund companies like Fidelity, VanEck and First Trust to launch bitcoin and other cryptocurrency ETFs.
“The more access people have to the financial system, blockchain and otherwise, the better. ETFs allow people to participate in the fun of owning crypto,” said Peter Singer, chief compliance officer at Fireblocks, a digital assets management firm, in an email to CNN Business.
“A crypto ETF makes sense and continues to broaden the market acceptance of cryptocurrency and the possibilities of the blockchain,” Singer added.
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