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Overbought ETFs could stoke next market crash - Expert

Overbought ETFs could stoke next market crash - Expert

Mubasher: Exchange-traded funds (ETFs) are overbought and could stir the next market crash, one expert said on Thursday.

Investors have injected sizeable funds into this kind of passive investments in the wake of the global financial crisis in a bid to slash risk, while paying very low fees, according to CNBC news.

Passive investors deem ETFs, which are a collection of stocks that track a specific index, a commodity, or bonds, as an easy option compared to active investing strategies.

Over the previous two to three years, passive investment strategies have unbelievably grown in the UK and Europe, head of trading at financial services firm BNY Mellon's Pershing Michael Horan told CNBC.

He added that “everyone wants passive, easy, wealth protection, as opposed to wealth generation, but it has got to the point now where some ETFs and some indexes are overinflated, bloated levels.”

In case of a shock, sell-off wave of those ETF positions, the bonds in particular, will be trigged in an effort to exit, Horan said. “It's going to be very difficult for the market to take the weight of all that selling,” he warned.

Earlier this week, the S&P 500 registered a record as the longest bull run in history. Some analysts say that its “continued growth” can never hold on for much longer, forecasting an “inevitable” crash.

If it happens, ETF holders can see big losses.

 Horan noted that increased banking regulation, such as the new Basel III rules, will make it difficult for lenders to further invest in ETFs.