ETFs and index funds must buy equity positions irrespective of price. For many investors, however, this passive winning strategy seems to be the latest craze. In recent years, investors have pulled billions out of actively managed funds and put more than $523 billion into U.S. equity ETFs.
The most noteworthy ETF that investors are shifting their money into is the S&P 500 ETF, $SPY, which has returned 400% since 2009. That’s a huge return for those who bought back when the market was bargain priced.
But that return only applies to those who bought more than ten years ago. At that time, $SPY contained the top companies in the S&P 500, all trading at reasonable multiples and therefore much cheaper.
Today, things look different.
The truth is that the market is significantly more expensive, actually overvalued, at the moment.
And instead of investors selecting stocks with decent valuations, they’re doing the exact opposite. They’re putting their money into index-based ETFs and funds that directly purchase expensive stocks.
If inflows continue at this pace, total inflows will again exceed $1 trillion, as in 2021.
This is not to say that all ETFs are overvalued.
Indeed, there are many ETFs that invest in bargain-priced companies or commodities with tremendous upside potential.
However, that’s not where most are putting their money. The majority invest in index-based ETFs and funds that buy particularly hot companies that all too often trade at enormous valuations.
This is quite concerning, as this may be the last market phase where investors flock to the top of a market at a frenzy.
That’s why back in August 2021, Michael Burry, the investor made famous by “The Big Short” movie, bet against Cathie Wood’s ARK Innovation ETF ($ARKK).
Yet there is an even simpler option for us.
We don’t have to engage in high-risk trades that require hours of research and monitoring of stock prices and other financial market data.
We can simply look outside these congested markets. There are numerous investment opportunities in our world that offer tremendous returns with little risk.
For example, buying a small business. In Germany, there is even an official platform for this purpose, called Nexxt, on which companies are offered for sale. There, company owners are often looking for a successor for their company because they want to retire.
The existing company owners have spent their lives building up the company, and therefore the continuation of the company is close to their hearts.
Many of these companies are sold at low prices and offer enormous growth potential with low financial and regulatory risk.