Monday, October 9, 2017

Top ETF Manager Warns About ETFs

The head of the fourth-largest exchange-traded fund provider has warned that investors are blindly pouring money into highly concentrated stock indices, putting them at risk of outsized losses if markets tumble.

Martin Flanagan, president and chief executive of Invesco, an asset manager that bought Guggenheim’s suite of ETF’s in September, said that relying on indices that weight stocks according to their market value could inflate losses if stock markets take a nosedive.

So-called “cap-weighted” indices direct money to the largest companies and to stocks with higher valuations. 

The S&P 500, the index tracked by the most widely held ETF, is currently dominated by five large technology companies — Apple, Google’s holding company Alphabet, Microsoft, Amazon and Facebook — which make up 11.7 per cent of the total index.

Flanagan said he was worried that investors were unaware of these high concentrations in funds they thought of as broad and diversified. “I am concerned about the financial impact to people who might not understand their exposures,” he said.

The 10 largest stock ETFs in the US are all weighted by market cap and have taken in close to $65bn of new cash from investors so far this year.

“Too many people have created their total portfolios with cap-weighted indexes thinking they are safe and cheap,” said  Flanagan. “The reality is they are turning more and more into momentum plays. You are ending up with a disproportionate amount of your portfolio in the biggest stocks.”

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