Lead-Lag Live: Mike Green on ETF Innovation, Passive Investing Risks, and the Future of Alternative Assets

Markets have become more efficient over the years. That’s good news for most retail investors. It means that they generally get the same information at the same time as professional investors. And it’s more challenging for active investors to find overlooked opportunities.

Part of the market’s improved efficiency has come from the rise of passive investment tools. ETFs that track a market index itself have grown popular, especially in retirement plans.

However, that does mean that investors tend to own the same basket of stocks. And since most market indices are weighted by market cap, it means most investors own the same large-cap stocks.

So when a big-name company misses earnings or otherwise sells off, all investors will take a hit. This rising concentration could be fueling higher market valuations than would otherwise exist.

Investors who use non-weighted ETFs may be able to obtain better performance over time.

That’s due to the higher growth prospects of smaller companies, and that such companies tend to have lower valuations and may even offer some income.

This increasing concentration risk in the market may be why wealthy investors continue to look at alternative investments. That includes more actively-managed funds that seek to profit without a heavy large-cap concentration.

To watch the full interview, click here.