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What the New Passive Investing Push Tells You

The popularity of exchange-traded funds fits with the market's Elliott wave structure

by Bob Stokes
Updated: June 30, 2017

Stock picking is losing favor. On the other hand, passive investing is growing in popularity. This fits with the stock market's Elliott wave pattern. The mania is not over, but the end might be closer than many investors realize.

 

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[Editor's Note: The text version of the story is below.]

Early summer dinner-party guests have gathered around the pool for a drink or two before dinner is served.

Two of the guests start talking about investing, and then one offers the other the all-too-familiar "stock tip."

The recipient might nodd politely, but increasingly, those tips are going in one ear and out the other. Passive investing is what's growing in favor (CNBC, June 26):

Exchange-traded funds, or ETFs, owned nearly 6 percent of the U.S. stock market as of the end of the first quarter, their greatest share on record.

Known as passive investments, ETFs are baskets of stocks tracking various market indexes and have grown in popularity for their relatively low fees. In contrast, mutual funds that involve higher-cost active stock picking have declined in popularity, and their ownership of the U.S. stock market has fallen to 24 percent, the lowest since 2004.

The article also notes that ETFS are on pace to buy $390 billion of stock this year, more than the last two years combined.

We're not surprised by this latest ETF data. Indeed, our January 2017 Elliott Wave Financial Forecast showed this chart and said:

Passive Investing: In Theory and then Practice, a Product of Supercycle Wave V

Notice that most of the rise in index funds' market share has come since the mid-1990s. This rise also fits the wave structure, as The Elliott Wave Theorist observed in 1997 that the final advance of the Grand Supercycle bull market would not be an ordinary bull market. It is a mania, and "a very human aspect of manias is that no prudent professional is perceived to add value to a client's investment experience."  ... The historically unprecedented demand for index funds shows that some mania traits remain in place. The popular appeal of index funds will likely grow as stocks trace out the final waves of Primary wave 5.

The final wave of the entire investing mania may not be complete, but this massive push into passive investing tells us that we're closer to the end than many investors might realize.

Now's the time to learn all you can about the market's Elliott wave pattern.

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FAQ: Is it possible that today's widespread computerized trading including HFT might cause the market to stray from the Wave Principle?

FAQ: Sometimes on your charts there is overlap between waves one and four within wave 5. Doesn't that break a rule?