The NYSE states that in the past 12 months investors traded $18.2 trillion worth of ETF shares. This is a 17% increase from the 12 months prior and more than triple it was 10 years ago.
The NYSE further states US ETFs only have $2.1 trillion in assets. In other words, the turnover in ETFs is about 870% per year which is more than four times the turnover for US stocks which comes in about 200 percent.
Moreover many ETFs have morphed into extremely complex cross correlated vehicles where few understand their composition and intricacies where volume is a major parameter.
What does this data suggest? Are many duped into some type of complacency regarding liquidity and safety?
We are expected to know and understand the products/issues recommended. What will happen if a crisis unfolds where massive selling of ETFs occurs? As noted the other day there are now more ETFs than hedge funds.
I can draw many parallels to the proliferation of CDOs and CMOs 10 years ago vividly recalling comments made to me by large firm sponsors are similar to the comments today about ETFs.
A major reason for the 2008 financial crisis few understood the composition and intricacies of the newly formed financial products hence firms were unwilling to submit bids when selling commenced. I clearly recall asking the question—what is in this portfolio and how is it constructed? The answer was “I don’t know. I just need a bid!”
I can argue this proliferation of ETFs is a contributory reason to the narrowness of the market, a view partially shared by the Treasury and the Fed as these entities remarked that technology based trading is having an overwhelming influence upon the markets.
Commenting upon yesterday’s markets, averages were relatively quiet digesting the first print of second quarter growth. The headline number largely matched expectations—rising by 2.3%. Consumer spending—led by autos–however rose by 2.9% versus 1.8% in the first. Analysts were forecasting around a 2.2% rise.
Regarding inflation, prices ex food and energy rose by 1.8% during the period versus 1% in the prior two quarters. Inventories also rose. The data suggests inventories for the first two quarters of the year were the biggest on record.
Inventory builds can be viewed as positive or negative. I typically view them negatively given these elevated stores have to be sold before new production can commence.
What will happen today? Futures are pointing to a lower market opening as a social media company disappointed. Bloomberg reports about 2/3 of the S & P 500 has posted results with 74% beating expectations and half exceeding sales expectations. Profits are expected to drop by 4%, shallower than July 10 when a 6.4% decline was forecasted.
Last night the foreign markets were up. London was down 0.12%, Paris up 0.29% and Frankfurt up 0.02%. Japan was up 0.30% and Hang Sang up 0.56%
The 10-year is off 1/32 to yield 2.26%.