Could this era be known as the ETF bubble?

Advisor concerned by the amount of money being arbitrarily pumped into US ETF market

Could this era be known as the ETF bubble?

The amount of money being thrown into the US ETF market is “crazy” and could define the current bubble, according to an advisor.

Jason Pereira, senior financial consultant at Woodgate Financial and IPC Securities Corp, said it’s hard to predict how the market will pan out as volatility returns, and passive and active approaches jostle for position.

But he believes the US ETF market, which holds about US$3.4 trillion in assets according to CNBC, has created a headwind that will prove hard to overcome.

He said: “The amount of money going into the US-based ETFs in packs on a monthly basis is just astonishing, so when you have demand side for your products that are so large, it’s hard to get correction.”

Pereira added that the problem is that trades can be unwound as fast as they go in and believes that history may not look back on this period with much sympathy.

“I think this bubble may be known as the ETF bubble when it finally blows up. When we go back and study it, it’s going to be like well, yeah of course we didn’t have correction mechanisms; we had an ever-increasing amount of population just buying everything arbitrarily.”

That results in pricing that relates to the whim of the buyer rather than any proof of performance from companies, he said, adding: “You can literally have a really crappy sector of the market in terms of performance but they could have a multiple of 30x PE because they are just having money thrown at them.

“Think about that. It’s your company, and you have a crappy year. Well, people are still buying your stocks because there is demand from the ETFs. It’s absolutely crazy.

“Even talking to active managers, they’re like, ‘price discovery barely exists any more’. It used to be that active managers would control the roost; they would basically negotiate the price themselves and then discover what that price was. Now the price is being set by people throwing money at it.”

These swings in pricing are compounded by the rush to join the weed and crypto express train. Again, Pereira remains ultra-cautious, refusing to buy in to the evangelists who can’t see any way these new ventures will fail.

He said: “Any time you make a single-sector bet you’re drinking some form of Kool-Aid – it’s hard to talk reason into people who bought into weed and bitcoin. You talk to some of these crypto nuts and they don’t even believe in [the prospect of] a loss or fraud.”

News of a friend wanting to start a marijuana business because he believes a third of the population will end up being consumers left the Toronto-based advisor scratching his head.

“Are you kidding me? One third? The only thing that more than one-third of people in Canada consume is water, food, shelter, TV and cellphones and cars. Other than that, one third of the population doesn’t do anything.

“So the estimates are so ridiculous. They just believe there is no possibility of loss.”


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