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Record ETF inflows fuel price bubble fears

Record-breaking inflows into exchange traded funds this year are fuelling fears that the tide of money surging into passive investment is helping to inflate a bubble in the US stock market.

Demand for ETFs has accelerated sharply this year, as a growing number of investors move into low-cost funds that track an index, and out of traditional actively managed funds in protest at inconsistent performance and high fees.

Investors have ploughed $391bn into ETFs in the first seven months of 2017, already surpassing last year’s record annual inflow of $390bn, according to ETFGI, a London-based consultancy.

The ETF industry has attracted almost $2.8tn in new business since the start of 2008, coinciding with one of the longest bull runs in US stock market history. The US benchmark S&P 500 index hit an all-time high on August 8, up 267 per cent since its post financial-crisis low in March 2009.

The rise of ETFs has prompted a growing chorus of criticism from some of the world’s most influential money managers, who complain about the effect of passive funds on asset prices and the potential for a liquidity squeeze in times of market stress.

“When the management of assets is on autopilot, as it is with ETFs, then investment trends can go to great excess,” said Howard Marks, co-founder of Oaktree Capital, the $100bn US alternative investment manager.

He cautioned that ETFs’ promise of ample liquidity has yet to be tested in a major bear market.

“It is not clear where ETFs and index mutual funds will find buyers for their holdings if they have to sell in a crunch,” said Mr Marks.

Paul Singer, the chief executive of Elliott, the $33bn US hedge fund manager, sharply criticised ETFs in a letter sent to investors in late July.

Demand for passive funds has been supercharged by governments’ manipulation of asset prices. This has “created the illusion that simply holding stocks and bonds in their index weights and sitting back, arms…

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