The whole idea of passive investing – investors easily tracking the market by owning index funds – has been turned on its head by exchange-traded funds (ETFs).
Now, most ETFs are index funds, but the investors who own those funds have become anything but passive. Active ETF trading has become the new passive investing, which makes ETFs potential financial weapons of mass destruction.
I've been warning my readers about the dangers of ETFs for years – namely, that these vehicles can lead to a crash when so-called passive investors turn active, as they have been doing lately.
Barron's front-page story last Monday morning about John C. Bogle, the so-called "father of passive investing" through mutual funds, got me riled up. It's a good summation of some of the problems with index ETFs, as Bogle sees it, but it doesn't go into the nitty gritty at all.
We will, though, right here, because doing that will help give us what we need to protect ourselves from the chaos that could be just around the corner…
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.