There are many widely-known benefits of owning ETFs because they allow investors to gain exposure to the stock market while encompassing diversification and risk mitigation. As such, they have been the go-to for both issuers and buyers. Now however, amid all the stock market chaos brought on by the pandemic, a startling realization comes to light.
It appears that ETFs have become so popular, that they are now significantly surpassing the number of publicly traded companies as a result. Three years ago the Wall Street Journal reported their observation on the dwindling numbers of public companies, where in 1996 there were a total of 7,322 listed on US stock exchanges, but come 2017, there only 3,671 remaining.
As it becomes increasingly easier to gain access to private-equity, growth, and venture capital, many companies have been foregoing initial public offerings as a method of liquidity and growth funding. Now, there are less than 4,000 public companies remaining; however, the number of ETFs has grown to nearly 7,000 across the world. And, as the popularity of ETFs continues to rise, a liquidity crisis could potentially unfold.
According to Michael Burry, who, over a year ago, noted that passive investments including ETFs artificially inflate bond and stock prices – much like collateralized debt obligations affected subprime mortgages during the Financial Crisis. Burry likened the developing ETF phenomenon to a bubble, where the longer it continues, the more severe its downfall will be.
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Information for this briefing was found via the Wall Street Journal. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
