This is how ETFs are rewiring ASX and could make or break your profits


The Pro Medicus Limited (ASX: PME) the share price hit a record $ 30.28 this morning despite being labeled a "speculative bubble" by the high-profile fund management team Forager Funds along with other companies with market values ​​over $ 500 million, but revenues of less than $ 50 million.

Other actions labeled include a bubble Audinate Ltd (ASX: AD8), Polynovo Ltd (ASX: PNV) e iSignthis Ltd (ASX: ISX). You can read the Forager report and further explanations Here.

24 June 2019 Pro Medicus joined the S & P / ASX200 index (ASX: XJO) of the 200 largest Australian companies, which is the most monitored index by passive investment funds that investors can buy shares through ETF (exchange traded funds).

According to a press release from the exchange traded funds trader Betashares I recently received, Australian ETFs now represent $ 50 billion of money for investors, with total growth of 25%, or $ 10 billion, only in the first half of 2019, although not all ETF funds pour in Australian shares.

Again these are some exceptional growth statistics and it is worth noting that ETFs now control more than the total market value of Telstra Corporation Ltd (ASX: TLS), or about 17 times the total market value of a S & P / ASX200 member how Pro Medicus.

If we consider how small the Australian stock market is outside the four big banks and some miners, we can see how ETFs charged with purchasing equivalent weightings of any member of the S & P / ASX200 may unduly influence stock prices.

Especially in titles with free floats as relatively illiquid as Pro Medicus.

As a reference since it was publicly confirmed on June 14, 2019 Pro Medicus would be added to the S & P / ASX200 the stock rose from $ 23.19 to $ 30.28 in about a month, although the company did not release news.

This suggests that tracking the index could be a distortion of valuations, with some traders, bettors or computers, probably trying to buy companies before being added to the index in anticipation of being able to get a quick profit by selling theirs. actions in the future. ETF.

The concern for active "value" managers struggling to reconcile these wild valuation moves is this Vanguard of The Australian leading stock ETF is worth only 10 basis points, which are generally less than 1/10 of what an active manager could charge between 0.8% and 1.5% or more per exotic strategies. And this is before the performance fees that limit your advantage.

The low taxes that are attracting money flooding in ETFs are increasing stocks of less liquid securities Pro Medicus and other new members of the S & P / ASX200 that Mr Johnson labels a bubble like Clinuvel Pharmaceuticals Ltd (ASX: CUV).

This could also become a multiplier effect as the "value managers" more ignore these securities and underperform the index, more money could flow into ETFs to chase them. It's about a vile circle.

The kicker is that Betashares expects ETF FUM to grow up to $ 60 billion by the end of 2019.

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Tom Richardson owns shares of Pro Medicus Ltd.

You can find Tom on Twitter @ tommyr345

Motley Fool Holdings Inc. is the parent company of Motley Fool Holdings Inc. which holds shares in AUDINATEGL FPO. Motley Fool The Australian parent company Motley Fool Holdings Inc. recommends Pro Medicus Ltd. Motley Fool Australia owns shares and has recommended Pro Medicus Ltd. and Telstra Limited. Motley Fool Australia has recommended AUDINATEGL FPO. We Fools may not all have the same opinions, but we are all convinced that, considering a wide range of insights, we have become better investors. The Motley Fool has a disclosure policy. This article contains only general investment recommendations (with AFSL 400691). Authorized by Scott Phillips.

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