The popularity of ETFs has accelerated in the past year based on net inflows. This has caused some to wonder if this is creating a new kind of bubble in the market. Most ETFs are market cap based and inflows are allocated across the constituents of the index with no regard for price or valuations.
We don’t believe this is creating a bubble and applaud ETFs for bring down management fees across most vehicles. However we do believe ETF flows are creating distortions as some underlying companies are more or less sensitive to ETF flows. And there is some risk in narrowly focused ETFs that may be masking less liquid markets with a more liquid ETF.