The stock market is relying more than ever on the world's hottest investment product

As one of the most important drivers of the eight-year equity bull market fades, another bullish catalyst looks primed to fill the void.

Exchange-traded funds will purchase $US300 billion of equities this year, more than 2015 and 2016 combined, according to Goldman Sachs. The firm raised its forecast after ETFs were responsible for $US98 billion of stock buying in the first quarter alone.

It’s just the latest in a flurry of signals that the $US2.8 trillion ETF market is not only growing rapidly, but also expanding its market influence as it gains in popularity.

Credit Suisse was forecasting that ETFs would see record annual inflows as far back as early May, while Moody’s predicted in February that passive investments will make up 50% of the US stock market by 2024.

Screen Shot 2017 06 26 at 2.07.04 PMGoldman SachsETF ownership is surging as mutual fund ownership slips.

The shift towards ETF investment comes at an ideal time for market bulls. Corporate share repurchases, which have served as a crucial backbone for much of the eight-year bull market, were down 18% in the first quarter on a year-over-year basis, according to data compiled by S&P Dow Jones Indices.

Even then, buybacks were still the biggest driver of equity demand during the period, Goldman says.

But the firm acknowledges that it scaled back estimates for repurchases amid expectations that tax reform will be delayed. President Donald Trump’s proposed repatriation tax holiday was expected to boost domestic cash holdings, but no reform of any kind has materialised.

The resulting gap in equity demand has been bridged not just by ETF enthusiasts in the US — foreign investors have also gotten in on the action. They bought $US55 billion of US stocks during the first quarter following two straight years of negative net demand, according to Goldman data.

Those foreign traders may be further persuaded to sink cash into US ETFs if dollar strength slows down, the firm says.

Still, amid all of the pro-ETF arguments being espoused, Goldman urges caution for investors blindly pouring money into such funds. After all, experts across Wall Street are expecting the S&P 500 to finish the year basically unchanged from current levels. On average, they see the S&P 500 ending the year at 2,414, less than 0.1% from last Friday’s closing price, according to a Bloomberg survey of 19 strategists.

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