A new study from Vincent Deluard of INTL FCStone dispels a long-running myth surrounding exchange-traded funds and passive investing, as it pertains to tech stocks.
As an extension of his argument, Deluard notes that market-dominating mega-cap tech firms may have further to run, despite trading at lofty valuations.
Deluard also argues that tech employees — who receive a significant portion of their pay in stock options — are the big winners of the $5 trillion ETF industry explosion.
The exchange-traded fund (ETF) industry has made a lot of people very wealthy over the past decade. But it’s also caught a great deal of flak.
Perhaps the most common argument is that the proliferation of ETFs — and the overall concept of grouping stocks into indexes — has distorted markets.
Naysayers have frequently blamed this so-called passive investing approach for the historically high valuations currently seen across the stock market. In their mind, ETFs have created a situation where individual stocks no longer trade on fundamentals. Instead, they’re simply dragged along with the herd in price-insensitive fashion.
And as the more than $5 trillion ETF market has grown, skeptical cries have only gotten louder.
Market-dominating tech stocks tend to bear the brunt of these cautionary arguments. This is because the sector’s outperformance has coincided with the ETF explosion. As such, one popular anti-passive thesis suggests that as money has flowed into market cap-weighted indexes, a lot of it has ended up in large tech stocks.
But Vincent Deluard, a macro strategist at INTL FCStone, says the exact opposite is true. He’s run the numbers and found that tech companies are actually underrepresented in passive funds and indexes.
This is because (1) their owners have disproportionately large stakes, (2) many high-profile hedge funds have amassed huge positions, and …read more
Source:: Business Insider