Are ETFs the canary in the ASX coal mine?


When the stock market rises everyone is happy and investors tend to invest more into stocks.

But alarmingly, rather than investing directly, investors are choosing index-tracking ETFs, so much so that we are seeing record levels of funds moving into these investments in much the same way we saw enormous sums of money move in managed funds prior to the GFC.

With the Australian stock market falling around 17% into June this year, investors became concerned about the possibility of a larger fall.

are etfs the canary in the asx coal mine

These concerns have arisen again over the past few weeks with speculation of an impending crash. During times like this investors, often make emotional decisions based on fear rather than rational thinking.

It is very common for investors to look at short-term returns and run for the hills if their investments are down or they switch funds, investment managers or exit the market altogether. History shows that investors tend to make these decisions at the wrong time and, in doing so, greatly affect their returns.

While we are seeing record levels of money moving into ETFs, especially index ETFs, we are not seeing an increase in borrowings that was prevalent in the previous year leading up to the GFC.

Given this, I don't believe we are near the point of any major meltdown on our market. As such, now is not the time to be changing investment strategies or making knee-jerk reactions, as you might just find yourself missing opportunities when the market starts to rise.

My prediction is that over the next few years, we will see a snowball effect of money moving into index ETFs at unprecedented levels, as well as investors borrowing heavily to invest in these funds.

This will significantly increase the speed of the snowball effect, which will be alarming in years to come. Many of you may remember during the GFC there were major concerns around index funds with many investors deserting them in droves after they fell heavily. Sadly, history is repeating itself and I can confidently say that Index ETFs will be at the forefront of the next major crash and not in a good way.

The best and worst performing sectors this week

The best performing sectors include information Technology up more than 3% followed by Materials and Healthcare, which are both up more than 1%. The worst performing sectors include Utilities down more than 2% followed by Energy and Financials, which are both down more than 1%.

The best performers in the S&P/ASX top 100 stocks include Pilbara Minerals up more than 19% followed by Allkem up more than 14% and IGO up more than 7%. The worst performing stocks include Bendigo and Adelaide Bank, Next DC, Woodside Energy, A2 Milk and Medibank, as all of these stocks are down more than 4%.

What's next for the Australian stockmarket

As expected, the All Ordinaries Index continued to fall, confirming a third consecutive week down with the index falling almost 6% since 16 August to 6947 points. Right now, I believe the down move may be over given that the market experienced a strong rise of 106 points on Thursday although this is unconfirmed. If Friday continues to trade up, then the likelihood the down move is over will increase.

I mentioned last week that I believed the market would most likely find support around 7000 points and I still believe this given what occurred this week. If the market has bottomed, as I suspect, then it will move up over the next four to eight weeks to erode most of the losses experienced this year. We may even see it challenge the all-time high of 7956 points set back in January of this year.

Before you get too excited, the low is not yet confirmed and we still need to assume the market will fall further until it confirms otherwise. We will know whether this is the case in the next few weeks, so I recommend investors sit tight until we can confirm a direction.

Get stories like this in our newsletters.

Related Stories


Dale Gillham is chief investment analyst at Wealth Within Limited (AFSL 226347). He also serves as the head trainer at the Wealth Within Institute (RTO 21917). He has more than three decades of experience in the investment industry, and is the author of How to Beat the Managed Funds by 20%, Dale's qualifications include an Advanced Diploma and a Diploma of Share Trading and Investment. He co-hosts the Talking Wealth Podcast, and his work has appeared in The Australian Financial Review, New York Business Journal, Wall Street Select and more.