ETF Investing – Professor Warns, “Cheap or Expensive, They Buy.”
“Cheap or expensive, they buy. They have to. Whether it’s an ETF or index fund, they cannot just hold cash, they have to buy equities.”
That’s what Michael Johannes, Professor of Finance and Economics at Columbia University, said to us over the weekend in a closed-door meeting. He was talking about how ETFs and index funds must buy equities regardless of price.
Professor Johannes was one of the speakers at the annual Atlas 400 meeting that I’m fortunate to be a member of.
And his words weren’t falling on deaf ears. The room was filled exclusively with Atlas 400 members, all of who pride themselves in actively taking control of their success.
However, for many investors, this passive success strategy seems to be all the rage.
“Over the past year, investors have yanked billions from actively managed funds and plowed more than $234 billion into U.S. stock ETFs.”
The most notable ETF that investors are moving their money to is the S&P 500 ETF, $SPY, which has seen a 244% return since 2009. That is an enormous return for those who bought back when the market was cheap.
However, that return is for those who bought nearly ten years ago. Back then $SPY held the top S&P 500 companies, all of which were trading at reasonable multiples.
Today is a different story. The reality is that the market is expensive right now.
And instead of investors picking stocks with reasonable valuations, they are doing the complete opposite. They are piling money into ETFs and index funds which directly buy expensive stocks.
In this year alone $135 billion dollars have flowed into ETFs. “If inflows continue at this torrid pace, total 2017 inflows will reach almost $540 billion, blowing past last year’s record $287.5 billion.”
Now, I’m not saying all ETFs are overpriced. In fact, there are many ETFs that invest in reasonably priced companies with tremendous upside potential.
But, that’s not where most are placing their money. The crowd is investing in ETFs and indexes that are buying top ranked companies that are trading for enormous valuations.
This is very concerning, as this could be the latter stages of a market where investors start pouring into the top of a market in a frenzy.
Some famous investors, like Jeff Gundlach, are even recommending to short $SPY.
But, there’s an even easier option for us. We don’t have to get involved in highly risky trades that require hours of research and monitoring stock prices.
We can simply look outside of these crowded spaces. There are numerous investing options throughout our world that offer incredible returns with low risk.
I’ve talked about many of them recently, like uranium, platinum, foreign real estate, and even agricultural land (actually, I have something new coming up about this).
These are all investments that are selling at historical lows and offer tremendous upside potential with minimum downside risk.