Martin Fluck submits:
We may not have long to wait for the collapse in the exchange-traded fund bubble. The ETF industry ran out of control long ago, but regulators can no longer ignore the retail money faddishly pouring into these funds, and how it is distorting market prices. Stuffed with exotic derivatives and super-concentrated bets on very risky markets, regulators are closing in. The steps they are taking will lead to a cascade of falling dominoes, as the more speculative ETFs are unwound.
But many of the markets that ETFs are indexed to are too small to absorb this kind of money, and so indiscriminate buying has forced up the value of bad companies as well as good. For some time, there have been suspicions that ETFs are pumping up emerging markets and commodities – which are, of course, interrelated.
ETFs’ big selling point has been that they are cheaper than traditional mutual funds, and they’re giving retail investors easy access to emerging markets and commodities for the first time. The assets they manage have doubled to $1.1 trillion since 2005, and the market is expected to grow another 20-30% this year. Mutual funds still dwarf ETFs, with $19.5 trillion in assets, but ETFs are taking a disproportionate amount of the money being invested in emerging market funds. Half of the $30 billion U.S. investors bet on emerging-markets in 2009 was in ETFs – which had $277 billion invested in commodity ETFs and other securities linked to raw materials by the end of 2009.