Perils of Passive

Fri, 2017/08/25 - 1:42pm | Your editor
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Mexico's current account deficit super-shrank to $321 mn in Q2 compared to $8.398 bn in Q1, the Mexican central bank said today. The deficit in the April-June period represented 0.1% of gross domestic product. You could say that is the real Trump bump. Meanwhile north of the Rio Grande, summer labor shortages are hurting not just the tourist industry, but also other service sector employers dependent on foreign labor during our vacation time. I note that two of my grandchildren are back in school now. Back in the dark ages when I was a teenager I worked as a summer replacement in NYC learning how to run a switchboard, write to customers, work an adding machine, and other useful skills for later life.

John Llewellyn from London commented today on the spread of exchange-traded funds and the passive investing they are used for. ETFs now account for $4 trillion in global investments, of which $3 trillion is in the US, triple their 2010 level and double their 2013 level. As much as 40% of US domiciled equity funds are now passively managed. Around 30% of equity trading in the US is by ETFs. Vanguard alone owns at least 5% of all the S&P 500 companies. Obiously, ETFs are a cheaper way to buy stocks.

So far, ETFs only account for about 10% of overall US market capitalization, and barely more than 1% of the more complex US bond market. Although debt-security and “smart” ETFs account for very little of the current market, they are the fastest growing parts of it.

He warns that while they offer attractions to investors, “their spread may bring an enhanced risk of market dislocation and turbulence when the current bull market finally ends.

He adds: “Critics worry that they undermine the price discovery process; encourage momentum investing; undercut the role of fundamental research; raise counterparty risk; foster liquidity mismatch between underlying securities and the fund [which own them]; increase volatility; and promote bubbles.”

He concludes: “ETFs remain largely untested in a crisis, and may exaggerate asset price declines in times of market stress.” John is the former deputy chief economist of the Organisation for Economic Co-operation and Development whom I know from Paris, who now runs Llewellyn Consulting, whose new email address is


More today from Israel, India, Ireland (a trifecta), Mexico, Britain, Canada, Chile, Germany, Denmark, South Africa, Brazil, Colombia, Bermuda, the Dutch Antilles, Japan, including companies reporting, the last pile-up before the next quarter results come out—I hope.

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