Passive investments such as exchange-traded funds are overbought and could spark the next market crash, one expert warned Thursday.
ETFs are a collection of stocks that track a specific index, a commodity, or bonds. This means that if the index that the ETF is tracking goes up, then the ETF will move higher too and provide those that bought it with some return.
Investors have flocked to these kind of investments in the wake of the global financial crisis as a way to reduce risk, while paying very low fees. Passive investors see them as an easy option compared to active investing strategies — where individual stocks are picked out based on research.
"Passive investment strategies have risen unbelievably in the U.K. and Europe over the last two to three years … And that's all fair and well, everyone wants passive, easy, wealth protection, as opposed to wealth generation, but it has got to the point now where some ETFs and some indexes are overinflated, bloated levels," said Michael Horan, the head of trading at financial services firm BNY Mellon's Pershing.