Etf inflows causing high P/E levels

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oppositeset
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Etf inflows causing high P/E levels

Post by oppositeset »

Any comments on Andrew Mcreath's thoughts given below on how etf inflows are causing high P/E levels



The record flow of funds into passive equity index ETFs continues to support share prices of the mega-cap (technology) companies. During April, we highlighted some charts that demonstrate the benefit of combining passive and active (long/short) strategies. Again shown in Figure 1, you can see that on a 100+ year trend band, the S&P 500 is currently at a "fork in the road". Although the index is near all-time highs, it is very possible that the index could continue to move higher. However, according to Figure 2, history shows that we are at a point in time where buying the index at current P/E levels locks in an extremely low potential annual rate of return of -1% to +2% for the next 20 years!

Conclusion: If history is a guide, it's time to add active long/short strategies to investor portfolios.
Thanh
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Re: Etf inflows causing high P/E levels

Post by Thanh »

I'm absolutely not a specialist in this matter but looking at it strictly from an inflow perspective is flawed. Imagine you sell 100$ worth of a TSX Composite mutual fund to buy 100$ worth of a TSX Composite ETF like XIC/ZCN. At the end of it all, you're left with the same basket of assets that you had before.

So to see if there's an underlying problem, one would have to look at where these inflows are coming from. I'm sure there's a huge volume of transfers from MF to ETF using the same asset allocations so part of it could just be a matter of outflow from mutual funds to buy the same thing but packaged as an ETF.
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Re: Etf inflows causing high P/E levels

Post by Rysto »

Yeah, it's silly to believe that ETFs and other index funds are having any special effect here. In 2000 and 2007 people were pouring money into traditional active mutual funds instead, and we got sky-high PEs and an eventual crash. If we get another crash, the fact that the vehicle will be the index fund this time doesn't mean much.
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Re: Etf inflows causing high P/E levels

Post by IdOp »

Agreed that index ETFs in themselves are not the problem. From the given quote it's hard to tell how much -- if at all -- Mcreath is blaming them. His main point seems to be that he feels markets are highly valued. This may be true. Then comes the sales pitch for active management. Or one could just re-balance and go lie down for a nap.
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Re: Etf inflows causing high P/E levels

Post by Peculiar_Investor »

oppositeset wrote: 08 May 2017 16:29 Any comments on Andrew Mcreath's thoughts given below on how etf inflows are causing high P/E levels
A link to the comments who be helpful, particularly since the quote contains mentions of specific figures.
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