Wednesday, 16 August 2017

Why passive investment is threatening markets?

Posted by Valentine at 12:39 Labels:

The number of people opting to make money with passive investment strategies is something to be worried about, according to key analysts at Morgan Stanley. But let's understand why...

This is not the first time we came across the concept of "passive investment". Just to refresh your knowledge, passive investing refers to trading strategies that require a small or even no involvement of the investor.

The reasons behind the decision of moving from active to passive investment funds are many, but most importantly: less fees, easier access, reduced risks and did I mentioned less fees?!

In other to understand the magnitude of how much money investors are pulling into passive funds, Bloomberg data says about $500 billion in the first half of 2017 only.

Exchange-traded funds (ETFs) are a sure choice for most investors willing to make money without getting too involved. In fact, so far this year $391 billion were poured into ETFs only, beating last year’s annual total of $390 billion.

Analysts believe this trend exposes a series of deep problems for equity markets. First, the huge inflow of capital makes more difficult to see the real picture and direction of markets.

Second, people are giving up an important control tool by placing money into passive funds. If things turn to the downside, active trading funds could serve to correct the market or at least support it. But in the current scenario, people have no voice.

Third, passive investment funds have a series of mechanism to prevent massive losses, which trigger in case of a sharp decline automatically, closing all positions. While that could prevent some extra losses, it enhances a cascade effect as a bearish wave is built on the way.

May be it’s time you take the lead.

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