The profound changes in the fund structure behind the increased volatility in the US stock market
Welcome to follow me, let's communicate together！
Recently, the US stock market has experienced drastic volatility, which has not only made investors nervous but also reflected profound changes in market fund structure, reshaping the market landscape.
Firstly, the valuations of US stocks, especially those of leading stocks, are not cheap.Taking Costco as an example, the company's valuation is expensive at crucial times, and any macroeconomic fluctuations naturally intensify the volatility of its stock price. The derivatives market of US stocks is also well-developed, with active options trading, especially on Fridays, the options expiry date, leading to even more intense market volatility. The case of Nvidia is a clear example, with its leveraged ETFs holding significant scale, and the amplification effect of options on the underlying stock should not be underestimated.
However, the more profound change lies in the huge transformation of fund structure.The scale of passive investment surpassed that of active funds for the first time by the end of 2023, signifying an acceleration of market polarization. Traditional mutual funds emphasize diversified investments, while passive ETFs allocate stocks based on market capitalization weightings, leading to funds becoming increasingly concentrated in leading stocks, driving up their valuations. This trend not only results in better performance of ETFs compared to mutual funds but also prompts more investors to shift from mutual funds to passive funds, further intensifying market differentiation.
Secondly, the rise of index and quantitative investing is altering the landscape of traditional value investing.Index funds do not consider stock value, only allocating stocks based on index components; retail investors lack systematic value investing training, making it difficult for them to accurately grasp a stock's true value; quantitative funds focus solely on short-term price trends, disregarding value factors.
Finally, funds always tend to flow towards market giants, exacerbating market differentiation.Leading stocks enjoy a premium valuation, and market capitalization growth exhibits power-law distribution characteristics. Industry leaders like Costco and Procter & Gamble continue to see their valuations rise, driven by the prevalence of passive ETFs. The concentration of funds into leading stocks highlights their weight in the market, leading to market extremity, increased valuation bubbles, and reflexivity risks, all direct consequences of the rise of ETFs.
Today, drastic market volatility has become the norm. The popularity of passive ETFs further intensifies market volatility. Every price fluctuation of leading stocks not only impacts investor sentiment but also has a profound influence on the entire market through their weight in indices. This fund flow pattern undoubtedly amplifies market volatility. If the high valuations of leading stocks do not receive the expected support from the market, they may quickly decline, potentially triggering systematic risks in the market.
In such a market backdrop, investors need to manage their investment portfolios more cautiously, especially in terms of risk control. Meanwhile, the trend of market differentiation suggests that investment portfolios are becoming increasingly dependent on the performance of a few stocks, weakening the diversification advantage of portfolios and increasing the risks of long-term investments.
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
Read more
Comment
Sign in to post a comment
73842510 : Excellent job Ava.