Delving deeper into Bubbles: “Tracking the ETF Industry Growth”

With the NASDAQ at an all-time high, some analysts are warning of a tech bubble. With housing prices in some parts of the U.S. approaching pre-2008 levels1, some are concerned about a housing bubble. Likewise, with global ETF assets surpassing $3.8 trillion in April 2, some investors are speculating that accelerated growth is creating an ETF bubble.

It’s true that, over the past 10 years, global ETF growth has enjoyed annual growth averaging 19.4%. Per Alta Vista Research, ETFs currently own an average 6.29% of the market cap of every stock. That’s a considerable increase over the 2.67% ownership five years ago. It’s this exponential growth that’s fueling the speculation about bubbles.

Without data, though, bubble murmurings remain just that – speculation. That’s why we developed tools like our Ownership Influence software to determine whether ETFs are affecting the valuation of individual stocks. This tool takes the 500 ETFs focused on U.S. equities and compares them to the Russell 3000.

Here’s one example from our research: 4.7% of Apple’s market cap is owned by ETFs, which represents 2.5% of our investable universe and only 2% of ETF assets. In other words, Apple is slighted over-owned by ETFs. That makes it hard to argue that ETFs are the force behind a tech bubble. The same holds true for virtually every stock in the S&P.

Dive a little deeper though, and the nuances surface. It does appear that as money flows into index funds, it buoys stock values. For example, equities in the real estate subsector, are overowned by ETFs, and seem to have formed a unique bubble. Almost 17% of National Retail Properties’ market cap is owned by ETFs, the average of all equities is currently 6.29%.

For our part, we’re convinced that the future of the ETF industry is bright. This belief fueled our desire to create the Toroso ETF Industry Index, which monitors the performance of publicly traded companies deriving revenues from the ETF industry. Composed of four tiers and over weights to companies having the most exposure to the growth of the ETF industry, the Index encompasses the entire ETF ecosystem of companies. While the assertion that ETFs are inflating stock values is largely overblown, it’s worth reviewing your portfolio to ensure that your ETFs don’t overown specific subsectors. We would be happy to evaluate your portfolio, look under the hood, and determine if any ETFs are affecting stock valuations.
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