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DüsseldorfHis idea went down in history: in 1974, John Bogle laid the foundation for Vanguard, the leading provider of exchange-traded index funds (ETFs). His argument: investors could confidently save the cost of active and expensive fund management because most funds do not outperform their market.
In no time, no investment product has generated as much enthusiasm for investors as for ETFs. While only 700 billion EUR had been invested in global ETFs in 2009, the global badets under management of these products at the end of the first half of 2018 amounted to 5.1 billion USD, according to the German Bundesbank.
But the triumphant procession of ETFs is calling more and more skeptics on the plane. Even Vanguard's founder comments critically: In an interview with US magazine Barron's, Bogle admits that index investing can destabilize markets.
He even thinks that the triumphant end of index funds is possible. In Germany too, the critical voices are increasing. The Deutsche Bundesbank has taken a closer look at the risks of ETFs in its latest monthly report.
ETFs, as well as active funds, can be used to describe highly diversified portfolios. But fees are generally lower for ETFs. Nevertheless, the major actively managed funds repeatedly succeed in leaving the market behind. Because removing an index offers opportunities for active investors. This is especially true when securities are undervalued in certain market phases.
"Active funds are showing their strengths, especially in times of crisis," said Greg Meier, vice president of research and capital market strategy for the US at Allianz Global Investors. For example, after the burst of the technology bubble from 2000 to 2002 and during the financial crisis from 2008 to 2009, active fund managers outperformed US standard stocks by 471 and 100 basis points, respectively, by compared to the benchmark.
But pbadively managed index funds do not concern the active selection of securities. They represent one-to-one indices, which generally weight securities according to their capitalization.
This can be tricky, especially for fixed-income securities: "For bonds, the biggest borrowers are the biggest in the bond index, but they are not always the strongest," Tobias C said. Pross, Global Head of Distribution and Head of EMEA at Allianz Global Investors.
As a result, less liquid market segments may affect the performance of index funds in times of crisis: "Problems can arise, especially with ETFs where the underlying baskets are less liquid," writes the Bundesbank in its monthly report. .
"In such a larger liquidity scenario, the market price of ETFs could fall below the value of the underlying portfolios." The faster investors sell their shares, the greater the selling pressure. As a result, "liquidity problems would either be promoted or even triggered".
As the ECB moves away from the corporate bond market, such situations are likely to increase in the future, market watchers predict. This applies in particular to index funds focused on corporate bonds.
Here, under market pressure, sales pressure could increase rapidly. This results in instant collisions, such as those seen in the markets in August 2015. In a matter of seconds, the S & P 500 stock index has slipped and lost more than five percent per moment. Many ETFs are falling even more clearly.
Another criticism is that ETFs can amplify trends and thus exacerbate accidents. After all, they buy the entire index market, placing them at the top of the best sellers. The more money there is in index funds, the greater the risk of herd behavior. They could increase the performance from top to bottom.
The Bundesbank is also concerned that investors will no longer be able to sell their ETFs easily during periods of low corporate development, as they must maintain a predetermined weighting.
Counterparty risk in synthetic ETFs may also be a problem. These do not follow an index by buying the underlying securities. Instead, the ETF providers agree to a swap, a barter transaction with a bank. The ETF provider may no longer be able to track the performance of the benchmark in the event of default by the counterparty of a swap.
Such a process could lead to a loss of confidence, especially if multiple ETFs are affected simultaneously, thereby triggering selling pressure on synthetic ETFs. According to the Bundesbank's badessment, physical replication with securities is becoming more and more common.
ETFs have responded to the market risks of synthetic ETFs: "The higher level of complexity, the risks badociated with swap trades and the lack of transparency of the securities held in the portfolio seem to play an important role here. "
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