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In recent years, passively-managed index funds attracted investors’ money away from active asset managers such as mutual funds. This is due to lower costs of index funds and lack of performance by active managers. Among the greatest beneficiaries are exchange-traded funds (ETFs).
Last December, investors rushed into equities and a so-called “Trump rally” took the markets into new highs. As Reuters reports, nearly $60 billion were added last month to domestic equity ETFs. This breaks a record set in November when $50 billion were added.
Not everyone thinks this bull market has much left to run. “Fund flows tend to be a good shorter-term contrary indicator, so the post-election buying spree bodes poorly for U.S. equities,” claimed David Santschi, Chief Executive at Trim Tabs. His company provides ETF data going back to 1993.
In 2016, investors added nearly $300 billion into ETFs. These funds aim to match the market rather than beat it, while their fees are low. Investors can choose among a great diversity of ETFS including funds based equities, real estate, bonds, precious metals, and commodities. It is possible to invest both domestically and internationally.
What’s more, there are inverse ETFS with which investors can bet on declines in asset prices. Some ETFs are leveraged two or three times, thus giving possibilities of greater gains. However, the risks of higher losses go up as well.
The recent rally has attracted many investors. So far, the market has been expecting that Trump’s administration will lower corporate taxes and reduce regulations, therefore, leading to higher profitability and stock prices.