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Bubbles Bubbling? ETFs, Volatility and Retirees

Some market pundit is always trying to scare investors with talk of the next market bubble and the impending market crash.  In this weekend’s shortened Blue Harbinger Weekly (it’s Easter!) we discuss the merits of three such bubbles that have recently been pushed by media pundits: 1) The Smart Beta ETF bubble, 2) The impending VIX volatility spike bubble, and 3) The giant vacuum and market crash to be created by retiring baby boomers.

The Smart Beta ETF Bubble:
This bubble postulated by the very analytical folks over at Affiliated Research may have some merit, however its consequences are only unfortunate and not dire.  As the theory goes, so many investors have piled into the same “smart beta” factor tilt portfolios that they’ve become self-fulfilling prophecies. Basically, as more people buy into the strategy, they drive the price up, and the good performance has nothing to do with anything fundamental or sustainable. And rather it’s just creating an overpriced bubble that will eventually burst as shares eventually revert to their intrinsic values.  And while this may be true, the result would be unfortunate for investors but not devastating.  Basically when this bubble bursts, investors will underperform the market by perhaps a few percent, but as long as the market in general continues to climb then these investors will still do okay.

Important to note, Blue Harbinger’s Smart Beta strategy is largely unaffected by the fears that Affiliate Research is pumping because our strategies are based on fundamental value (by definition the things our ETFs hold are trading at an attractively low price).  For reference, here’s a link to a video with more information from Research Affiliates.

The Impending VIX Volatility Spike and Bubble:
A recent Wall Street Journal article notes that “some investors are so worried stocks will tumble that they are willing to lose mmoney to protect themselves.”  Basically, investors are purchasing ETF shares that will rise when the markets so called “fear guage” (the CBOE Volatility Index, or VIX) rises.  

The VIX has been declining sharply since mid-February (meaning the market has been steadily climbing) and apparently this has many investors spooked as they’ve piled into ETF’s where value rises when/if the VIX spikes. Apparently many investors have not forgotten the pain caused by the financial crisis and market crash of 2008-2009, and they’re want to be prepared if something like that happens again.

In reality these VIX-linked ETFs are just a ploy by some ETF company to frighten you into buying their ETF and paying their fees. In reality, long-term investors should not get scared when the market gets bumpy.  “Buy and Hold” is a proven successful strategy.  Additionally, the market has more than recovered since the financial crisis for those who were brave enough to buy and hold.  And if you are not able to invest for the long-term (i.e. you need your money within the next couple years) then you shouldn’t have all your money in the stock market.  Keep some money in cash at the bank, or buy fixed income (bonds) which have less volatility and make regular interest payments. You need to be able to sleep at night.

The Retiring Baby-Boomer Crash:
This morning on CNBC some media pundit was advising investors to exit the stock market altogether because he believed as baby-boomers retire they will sell their stocks and the market will crash.  These types of fear-mongers are a dime a dozen and you should not pay any attention to them.  Investing for the long-term in a proven winning strategy, and a far greater risk is NOT investing in stocks for the long-term because you will miss out on so much long-term growth. Compound growth is an amazing wealth-building power.

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