Much has been written about the boom in index investing and its effects on active funds managers. Less known is how growth in Exchange Traded Funds (ETFs) is hurting parts of the market, notably small-cap stocks that have less coverage than ever, creating opportunity.
I see two main investment implications of the trillion-dollar global ETF market. First, it’s killing underperforming active funds managers that charge high fees and deliver lower performance than comparable ETFs. Inevitably, that means more small-cap funds exiting this market.
Pressure on active funds management flows through to broking firms and research teams. Brokers have fewer small-cap analysts or less-experienced ones. The same is true in media; experienced journalists who specialise in small-cap stocks are rare.