This is mostly to claim some doomsayer fame in future. I’m writing this on Mon Dec 23 2024…

Disclaimer. As anything else written in this blog, this article is for informational/recreational purposes only. It is not to be relied upon as a professional opinion whatsoever. For financial advice please seek certified professionals.

So. Every investing book out there for the past few decades is singing the same song. “Invest in an ETF that’s following a diverse index”.

The reasoning behind it is sound. Most indices are by nature diverse. E.g. SP500 is tracking the top 500 large-cap U.S. equities. It’s like a pointer that always points to the best of the best. By definition.

Also by sheer number alone it guarantees diversification which is the holy grail of risk-mitigation when it comes to investing.

And there’s more. Numbers are crystal clear in showing that indices are growing ever since their inception. They essentially are following the evolution of the economy they index and unless we’re talking of very specialised pockets of the economy the economy as a whole has been growing. It has had its hiccups (e.g. COVID) but every time it bounces back stronger and always trending upwards.

All of this is legit.

So, the prudent move for any investor with some brains in his head is to invest in indices. And the way to do that is through ETFs that is mirroring indices. Choose a broad-enough index (e.g. SP500), then choose an ETF based on that index and start buying shares of that ETF. Actually automate this even more by having some of your monthly salary purchase some ETF shares on a monthly basis. Automatically.

This has been extremelly popular for at least a decade now. And has delivered well. For example one of the biggest (i.e. popular) world ETFs,iShares Core MSCI World UCITS ETF USD (ISIN: IE00B4L5Y983), has delivered +521.52% since 2010. That is beyond amazing.

That is beyond amazing.

Enter Apple (NASDAQ: AAPL). At the time of this writing it constitutes 4.79% of above ETF holdings. After that is NVidia (NASDAQ: NVDA) with 4.75%. And so on with Microsoft, Amazon, Meta, Alphabet, Tesla. 69.19% of this ETF is invested in US companies. The next national market being Japan with 5.46%. So. Evidence number 1. Above ETF despite being a “world” one is almost by 70% a US invested ETF.

Now there seems to be a slight problem with US stock market. Take Apple for example. At the time of this writing its stock is trading at 254.49$ with a Price to Earnings (P/E) ratio of 41.86%. Now if we are to give any credit to fundamentalists, that arcane sect with members like Warren Buffet, a good P/E ratio for a stock is below 10. Some would go as far as 10-20. But 40ish is not something they’d stomach. That is to say that Apple stock seems way overvalued. The numbers look like that for all the big names that constitute the “world” ETF. So. Evidence number 2. Most of the holdings of the “world” ETF is overvalued stock according to fundamental analysis.

Now, and you’re not going to like this, there seems to be a systemic reason for this overshoot. And it’s not speculators that buy more Apple stock, despite their knowning of it being blown up disproportionaly, just to sell it a bit later for a profit. Let’s look who’s owning Apple. Here’s it https://finance.yahoo.com/quote/AAPL/holders/. Top holders is Vanguard and Blackrock with 8.91% and 7.23%… These happen to be the top issuers of ETFs. The example ETF we reffered at (iShares Core MSCI World) is issued by Blackrock. So. Evidence number 3. ETFs are already the biggest holders of the biggest companies indexed by the indices that these ETFs are mirroring.

Now let’s see what happens when you automatically save 100$ every month and direct them into the above ETF. 4.79$ of these are buying some Apple. Why? Because by definition that’s how ETF nvests your money. Mirroring the MSCI index it will invest to the companies in the index according to their weight on the index. Essentially your automatic money is voting for the current state of things. This makes the current state of things stronger. Apple stock is going up. Automatically. Your money won’t care if for example Apple went crazy and announced that it will ditch computers and start selling fruits. It will still buy Apple. Untill something else pushes Apple stock out of the index. Do you see it yet? ETFs are not mirroring the indices anymore. By their sheer weight and automatic nature they actively affect the indices. They are a major player in themselves and they are overheating the stock market. They are not mirroring a bubble. They are driving the bubble.

Now. Nobody knows the future but usually the markets correct themselves. At least they have done so for as long as they exist. I’m afraid that index-based ETFs will be one of the major if not the major culprits of the next market crash. And that’s hugely ironic because they indeed are the safest and most conservative investment vehicle. As long as we don’t jump on them en mass.