The global ETF market just climbed to a new record high above $5 trillion

Charles McQuillan / Getty Images

Money poured into exchange traded funds (ETFs) at a record rate in January, just prior to last week’s stock market jitters which saw the S&P500 fall by 5.2%.

A Financial Times report said ETFs globally attracted another $US105.7 billion of capital last month, based on preliminary data from consultancy firm ETFGI.

That took total ETF inflows past the $US5 trillion mark for the first time, as investors continue to flock to the low-fee model of passive investment schemes over actively managed funds.

An exchange-traded fund is a passive fund which tracks an index — as opposed an active fund, which seeks to outperform a given index through frequent buying and selling of individual securities.

The ETF industry is dominated by the world’s two largest asset management companies, BlackRock and Vanguard.

BlackRock led the way in January with new inflows of $US28 billion — up 46% from the prior year — while Vanguard inflows fell by 30% from the same time last year to $US11 billion.

Exchange Traded Funds have attracted huge amounts of capital over the last five years amid an investment backdrop of low volatility and steady growth.

But a number of analysts have expressed concern the ETF model could add to contagion risk if huge passive capital flows switch from buying stocks to selling them instead.

The concerns gathered weight last Monday night, when a spike in bond yields in the wake of US wage data sent jitters through global stock markets.

Amid the chaos of last week’s selloff, most of the focus was on the potential damage stemming from the unwind of leveraged trading strategies based on shorting the VIX volatility index.

But billionaire Carl Icahn said on Wednesday that passive investing vehicles need more regulation and pose a serious bubble risk for markets.

And Deutsche Bank analyst Jim Reid said last year that passive ETFs have the capacity to skew markets because most of the funds are allocated to bigger stocks.

In a recent note to clients, Gluskin Sheff chief economist David A. Rosenberg noted 80% of the S&P500’s climb in 2017 was driven by the largest 10 stocks in the market.

In view of that, Rosenberg raised the point that index-tracking ETFs don’t actually provide a particularly diversified exposure.

So while record amounts of money continued to flow into the world’s biggest ETF managers in January, last week’s jitters are a warning that ETFs could face their first big challenge if volatility returns to markets in 2018.