Juggling Dynamite

At the end of June 2025, the Global Exchange Traded Fund (ETF) industry had 14,390 products, with 28,447 listings, from 876 providers on 81 exchanges in 63 countries (source: ETFGI). As shown below, since 2007, the $16.99 trillion USD of global market value was 5.7x the $2.948 Tn in 2015 and 20x the $831 billion of 2007.

In the first half of 2025, global ETF assets increased 14.5% on robust monthly inflows totalling $897.65 billion in June alone–the highest on record and the 73rd consecutive month of net inflows. iShares Core S&P 500 ETF (IVV US) gathered $13.81 Bn, the largest individual net inflow.

The top 10 Exchange Traded Products (ETPs) by net new assets collectively gathered $3.13 billion in June–8 of the 10 in the precious metals space (see table below). iShares Physical Gold ETC (SGLN LN) gathered $680.44 Mn, the largest individual net inflow.

A world of heavily promoted investment products holding similar assets in different marketing wrappers offers much less diversity than imagined. Three companies, Vanguard Group, BlackRock Inc. (iShares owner), and State Street Corp., now collectively control more than 75% of US ETF assets.

Nearly 60% of the capital in US markets has been passive (as shown below since 2009), characterized by automated buying, without anyone conducting investment analysis or selection. So much for the timeless adage that we should only invest in things we understand.

Chartered Financial Analyst Michael Green has been a leading voice on the reality and dangers of passive flows. He updates on the latest trends in the segment below, noting that most market participants are utterly unaware of what’s happening with their money.

Michael Green of Simplify Asset Management explains how passive investing distorts markets and will create a bubble. He also discusses how the Pension Protection Act further spurred passive investments, especially since vast majority of people have ‘absolutely no idea’ what is happening with their retirement funds. Here is a direct video link.

As we have seen repeatedly, passive inflows fuel risk-complacency and extreme over-valuations, but they do not hold market prices up permanently. If passive flows were crash protection, we would not have seen recurring market freefalls in recent years, even with employment near-cycle highs.

Market sentiment turns at the margins. Inflows continue until job losses rise enough to curtail and reverse them. Job losses are increasing now. There’s also the 43% of assets that active funds and trend-following managers direct, along with share buyback programs that typically retreat as prices fall.

Concentrated masses with little cash and the same long-duration assets magnify downside risk and the need to sell the same holdings simultaneously. We’ve seen this film before.

Like last September, financial markets have high hopes for rate cuts and dovish comments from the US Fed and Bank of Canada today.

Futures markets are pricing 150 basis points of Fed cuts by the end of 2026 (taking Fed policy down to 2.75% to 3%) and 75 basis points from the Bank of Canada (reducing the BoC target to around 2%). But a lot can happen over the next 15 months.

Grossly inflated asset prices are extra vulnerable to any disappointments.

There’s no doubt that labour markets have weakened over the last year, but inflation readings remain above target.  Financial strife is spreading through the economy. Easing of the overnight rate will be welcomed by debtors, but not enough to remedy the insufficient income that’s ailing them.

As far as Canada’s ongoing housing debacle, supply is coming onto the market at more than double the rate of demand, with August new listings up +2.6% over July. Properties “For Sale” have risen 8.2% year over year.

Economically impactful, new housing starts tumbled 16.3% month over month in August to a five-month low of 245.8k units annualized, sharply below the consensus forecast of 280k units.

Meanwhile, financial undertakers remain in high demand. Insolvency Trustee Scott Terrio reports carnage from the front line.

The segments below offer context on similar trends in America.

Credit scores are falling at the fastest pace since the Great Recession as Americans struggle to keep up with the high cost of living and the return of student debt payments. The national average FICO score dropped by two points this year, the most since 2009, according to data released Tuesday by the analytics company. Although credit scores remain significantly higher than during the Great Recession, they are down for the second year in a row. FICO found a growing share of borrowers are falling behind on car loans, credit cards and personal loans. Here is a direct video link.

Consumer sentiment in the US is sliding to near historic lows as Americans grow increasingly frustrated with the economy. But don’t tell that to stock traders. The S&P 500 has hit four record highs this month. Here is a direct video link.

Since 1950, the S&P 500 index has averaged a 5-year annualized earnings growth rate of 7%. Today, S&P 500 pricing assumes a forward 5-year annualized earnings growth rate of 15% (Rosenberg Research).

Leveraging this extraordinary optimism, the S&P 500 is trading at more than 23x 5-year forward earnings expectations, some 28% above the longer-term historical average of 18x, and 38x its Shiller CAPE (10-year Cyclically Adjusted Price-Earnings), more than 120% above CAPE’s 17x long-term average.

Indeed, on all 8 of the most historically reliable valuation measures (Trailing P/E, Forward P/E, CAPE, price to book, price to sales, EV/EBITDA, Q Ratio, and Market Cap to GDP), the stock market today is the most richly valued since at least 1900, and comparable only to the infamous bubbles of 1999, 1965 and 1929 (see red circles).

Although the economy and income growth are stumbling on most fronts, hope springs eternal that Artificial Intelligence (AI) spending will overcome all problems.

The top ten most expensive S&P 500 companies (9 of which are tech cos, as shown below) make up over 39% of the market cap (this was less than 30% at the last tech bubble peak in March 2000), while the top 5 most expensive (all tech cos) make up 27% (this was 12% in the 1965 secular market peak).Historic concentration in one sector (tech) means that stock investors are exposed to more single stock/single sector risk today than ever before. Some rare and vital perspective is offered in The Market’s Riskier Than It Used to Be—and Investors Love It:

Investors have a strange relationship with risk. On the one hand, they want it: Risk brings reward when it works out. On the other hand, unrewarded risk is the very last thing anyone wants.

The result is the all-too-familiar swing between fear and greed, boom and bust, as investors switch from loving risk to fleeing it. This is relevant to today’s stock market because the market is riskier than it used to be on three important metrics:

First, it is much more concentrated in a handful of stocks than in modern times. That means investors who simply track the market are taking much more single-stock risk than in the past.
Second, the stocks that dominate the market are heavily exposed to one big bet, on generative artificial intelligence, into which they are expected to pour almost $400 billion this year.
And third, everyone agrees that those stocks are phenomenal and bound to go up, creating a form of groupthink vulnerable to a sudden reverse on any setbacks.

“So like around March I could feel it coming. I just—I had to play. I couldn’t help myself. And three times the same week I pick up a—don’t do it. Don’t do it. Anyway, I pick up the phone finally. I think I missed the top by an hour. I bought $6 billion worth of tech stocks, and in six weeks I had left Soros and I had lost $3 billion in that one play. You asked me what I learned. I didn’t learn anything. I already knew that I wasn’t supposed to do that. I was just an emotional basket case and couldn’t help myself. So, maybe I learned not to do it again, but I already knew that.”