— portfolios that hold every stock in a market benchmark with utterly no regard to price. Several hedge-fund managers and other active stockpickers have told me that this “mindless money” is distorting valuations and pumping up a potentially monstrous bubble,” Jason Zweig Reports From The WSJ.
“At first blush, it is hard to imagine that they are wrong. As money pours into the ETFs, they must mechanically match their holdings to those in the emerging-market indexes. That forced buying drives up stock prices, attracting still more new money into the ETFs, spiraling stock prices even higher,” Zweig Reports.
Even Gus Sauter, chief investment officer at Vanguard Group, one of the world’s largest managers of index funds and ETFs, is concerned. “Obviously it’s the last trade that determines the price of everything,” he says, “and there have been large flows [from ETFs into emerging markets], perhaps leading to a bit of a bubble.” Mr. Sauter adds that several markets, such as Brazil and Peru, are up roughly 100% in 2009. “Either something has changed quite dramatically,” he deadpans, “or pricing has been dislocated from reality. And it’s probably a little bit of the latter.”
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