The fund space traded on the exchange is lively for retail investors, with flashing market warning signals.
As individuals pour billions of dollars into some of the most dangerous pockets of the exchange trade fund market, some experts, like Mike Akins of ETF Action, have questioned whether this trend is a sign of an overheating in the market.
“The spread of products in the ETF market is now the highest ever,” the company’s founding partner told CNBC’s ETF Edge this week. “We have seen all the indications of these kinds of niche strategies, especially in thematic and innovative spaces, and the kinds of flows for 2020 and 2021 are beginning to approach the top of the market once again.”
Institutional investors account for around 64% of the total ETF market, with the recent 13F filing being compiled by the ETF Action Show. In contrast, they rarely exist in rapidly growing categories such as single-size ETFS and leveraged or reverse strategies, accounting for around 9% and 10% of investors, respectively.
Non-traditional ETFs with reverse funds exceed the year at over $600 billion a year, according to ETF Action Data. According to Akins, the small number of agencies involved in these speculative strategies are primarily there to provide liquidity rather than allocated.
“These strategies are very unstable. 99% are owned by retailers. There are no institutions to allocate these strategies, but they have billions of dollars in them,” he added.
Akin is particularly dangerous when it comes to yield-focused products such as covered call ETFs tied to individual stocks. If the underlying stocks are rising, they may generate stable income, but if the stocks decline, payments can become unsustainable.
“It’s a train wreck.”
“If there’s a stacking range strategy that pays 100% revenue each year and the underlying doesn’t keep rising, it’s a train wreck,” he said.
Retail appetite for these funds returns to the pandemic-era surge in ETFs with themes including ARK Innovation (ARKK), which saw massive retail-driven influx at the height of bull markets. The historic similarities should pause to investors, Akin said.
“In general, when we start to see the flow to these products take off, it’s a paradoxical signal that we’re overheating across the market, and that’s what we see many times in terms of the flow of money chasing returns.”
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