The stars seemed to be aligned, leading many investors to be concerned about there being a bubble in the stock market. First, we've had one of the greatest rallies ever, with the S&P 500 rising from its low of around 666 on March 6, 2009 to crossing the 1,800 level on November 18, 2013, a price-only increase of about 170 percent. That kind of increase causes investors to be concerned that prices are "too high." You hear phrases like, "the market has gotten ahead of itself." Adding fuel to the fire is the concern that the Federal Reserve's easy monetary policy (both its policy of basically a zero Federal Funds interest rate and its bond buying program) has fueled an asset bubble.
The stars came into further alignment when Professor Robert Shiller, author of "Irrational Exuberance," was recently awarded the Nobel Prize in economics, bringing more attention to the question:
Picking from the multitude of style ETFs is a daunting task. There are as many as 45 in any given style and at least 230 ETFs across all styles.
Why are there so many ETFs? The answer is: because ETF providers are making lots of money selling them. The number of ETFs has little to do with serving investors' best interests. Below are three red flags investors can use to avoid the worst ETFs:
I address these red flags in order of difficulty to overcome. Advice on How to Find the Best Style ETFs is here.
How To Avoid ETFs with Inadequate Liquidity
This is the easiest issue to avoid and my advice is simple: Avoid all ETFs with less than $100 million in assets. Low levels of liquidity can lead to a discrepancy between the price of the ETF and the
Minyi Chen, CFA, Chief Operating Officer of TrimTabs Investment Research and Portfolio Manager of AdvisorShares TrimTabs Float Shrink ETF (TTFS) shares recent fund flow trends.
Demand Indicators Point to Jolly Holiday Season for U.S. Equity Investors. ETF Flows Turn More Encouraging for Short Term.
Our demand indicators suggest the stock market party can keep right on rolling through the holiday season. Reflecting the impact of ongoing Federal Reserve stimulus, our demand indicators remain very favorable for the intermediate term and have turned more favorable for the short term. Any market dips should be treated as buying opportunities.
ETF flows have turned more auspicious for stocks in the short run. Investors in leveraged ETFs, who tend to be poor market timers, turned more pessimistic. They pulled 0.6% of assets out of leveraged long ETFs in the past week and added 0.4% of assets to leveraged short ETFs.
(click to enlarge)