The exchange-traded fund (ETF) space is buzzing with activity from retail investors, though there are some, let’s say, alarming market warnings in play.
Many individuals are directing billions into what some experts consider risky segments of the ETF market. Mike Akins from ETF Action expressed concern this week, suggesting this behavior might signal an overheated market.
“Currently, the number of products in the ETF market is at an all-time high,” Akins told CNBC’s ETF Edge. “We’re witnessing significant interest in niche strategies, particularly those that are innovative or thematic. The inflows seen in 2020 and 2021 are starting to match those peak levels again.”
Institutional investors make up roughly 64% of the total ETF market, as highlighted in the recent 13F filings compiled by ETF Action. Yet, they are notably absent from rapidly expanding categories like single-size ETFs or leveraged and inverse strategies, which attract just about 9% and 10% of these investors, respectively.
According to ETF Action data, non-traditional ETFs, especially those with inverse strategies, have surged past $600 billion this year. Akins pointed out that the limited number of agencies participating in these speculative strategies mainly serve to provide liquidity.
“These approaches are quite volatile. Retail investors hold around 99% of them, and there aren’t institutions backing them. Yet, there’s a hefty amount of capital involved,” he mentioned.
Akins raised a particular red flag regarding yield-focused instruments, like covered call ETFs tied to specific stocks. While these can generate reliable income if the stocks rise, declines in those stocks can lead to unsustainable payouts.
“It’s a train wreck.”
“With a stacking range strategy offering 100% returns annually, if the underlying assets don’t keep climbing, it’s a disaster,” he observed.
Retail interest in these funds harks back to the pandemic period when ETFs centered around themes such as ARK Innovation saw an overwhelming influx tied to retail enthusiasm during the bull market. Akins warns of striking historical parallels.
“Generally speaking, when we note significant inflows into these products, it often signals an overheating market. This pattern reflects what we frequently observe as money chases returns,” he added.
