The View | Ignore the warnings about ETFs for now

Exchange traded funds (ETFs), increasingly popular investment products which track a specific index or prices of an asset class and offer investors a cheaper alternative to more expensive actively managed funds, have amassed assets of US$4.3 trillion, even larger than those of the global hedge fund industry.

Inflows into ETFs in the first seven months of this year surged to US$391 billion, slightly exceeding the record inflows for the whole of 2016. Since 2012, inflows into ETFs have risen by nearly US$2.3 trillion, with the bulk of the new money being ploughed into the funds since the end of 2015, according to ETFGI, a London-based consultancy specialising in ETFs.

With global stock markets hovering near record highs and ETFs accounting for seven of the 10 most actively traded securities on US equity markets last year (and nearly a quarter of all US equity trading by volume) according to Credit Suisse, fears are growing about the “ETF-isation” of markets.

Regulators, including Ireland’s central bank and the International Organisation of Securities Commissions (the umbrella body for securities regulators), are scrutinising the ownership and pricing of cheap ETFs. Since the funds are passively managed - computer-powered investment vehicles that simply track a market-weighted index and charge much less than actively managed funds which are run by professional stock pickers and, provided they make the right calls, can deliver much higher returns - there are mounting concerns that ETFs are amplifying risks in equity markets by essentially putting investment decisions on autopilot.

These concerns are being fuelled by the growing influence of ETFs in other asset classes, notably the frothy US bond market and, more alarmingly, emerging markets.