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In an interview with CNBC, Douglas Yones, the Head of Exchange Traded Funds at the New York Stock Exchange claimed ‘this could be the year for actively managed’. Whilst, Yones continued to stay loyal to the ETF movement, by advocating the use of ‘actively managed ETFs’, this messaging shows clear signs that a passive approach is becoming increasingly unsuitable in what has become a highly volatile market.
Nigel Green the founder & CEO of the deVere Group commented ‘the world has had a massive reset. New industries and new companies will emerge. ETFs are the wrong place to invest right now. Actively managed funds will outperform ETFs in 2020 and beyond.’
Green’s comments will do little to ease the nerves of DIY investors who have become dangerously overexposed to ETFs. The ETF movement has grown massively in popularity over the last decade with an increasing number of people opting for a passive approach.
Why have ETFs become so popular?
There is a very clear correlation between average market performance and the popularity of ETFs. When markets perform favourably, ETF-investors will generally see positive results. However, when markets inevitably become volatile, ETF-investors are often left stunned as their portfolios drop sharply in value.
The period between 2008-2020 saw the longest-ever bull run in history. Markets year-on-year performed favourably, providing ETF-investors with a sense of overconfidence, however, the bull run came to an abrupt end in March and with it, came the realisation for many ETF-investors that their strategy was not as bulletproof as it appeared.
Tom Rosser, investment research analyst at The Share Centre, noted: “We’ve seen more than eight years of gains on the FTSE 100 erased in a month, the fastest bear market plummet in history on Wall Street, and global stocks having their best and worst sessions in a decade on consecutive days.”
The S&P 500 and the NASDAQ have recovered relatively well from the quickest slide in market history.
Other markets measures haven’t been so lucky.
The Russell 2000, which consists of smaller companies, is down about 22%. An exchange-traded fund that tracks markets in emerging economies such as China, India and Brazil, is down 20%, while another ETF that follows international stocks has fallen more than 16%. Even Main Street’s favourite market indicator, the Dow Jones Industrial Average, is down more than 10% over the past year.
As the dust has begun to settle, certain companies have emerged as clear winners, whilst others have felt and continue to see huge losses. For ETFs, this is largely unfavourable as returns (for example on an S&P 500 tracker) are determined by the performance of the 500 largest companies, rather than the positive performance of select stocks.
In these volatile times, active management and professional advice is a key element in protecting and growing your portfolio. To speak with a specialist, please click on the link below.