In the last five years, Visa's share price has gone from $55 to about $150 in early October, while Mastercard’s climbed from $73 to over $220 before the latest downdraft. Even more remarkable is Amazon, which went from $1,000 to $2,000 in the last 12 months.
Having been humiliated so often by markets, I don’t pretend to be an investing wizard. But even I can see plastic is replacing cash and confess to owning small holdings in both Visa and Mastercard. If only ETFs like MTUM could do the same kind of damage to my other mutual funds, ETFs and stocks that it has done to the credit card concerns, I’d be a very happy investor.
But in the current market, they are just a few more momentum stocks with a light-asset business model and that should explain a lot. For its part, Amazon is trading at some unheard-of metric like 26 times book value.
Many people are searching for scapegoats when the reality is that the economy is entering the advanced phase of the cycle. Profit expansion is slowing at the same time as interest rates are rising. Reasons for financial markets to reprice assets abound.
Yet Cramer, who many people have told me is a well-meaning individual, believes otherwise. He seems convinced that quasi-proprietary indices like MTUM will eventually “take over the direction of the stocks, as the physical trading of the actual stocks the pressure these indices put on them.”
The problem with this argument is that it flies in the face of several facts. One reason ETFs were created was to cushion the impact of the collision between technology and regulation that surfaced in the 1980s with the advent of trading in stock index futures. That led to program trading, yesteryear's bogeyman.
Indeed, the dollar volume of futures trading soon dwarfed the actual cash volume of individual stock trading shortly after the derivatives were introduced. The end result was the October 1987 stock market crash, when the Dow Jones Industrial Average dropped 23 percent in a single day.
Today, many investors are worried about a credit market bomb, as bond trading has dried up over the last decade. But some think fixed-income ETFs could cushion the damage from this sort of potential market dislocation. When this happened during the financial crisis, ETFs tracking various bond indices were one of the view places investors could discover any approximation of what price their bonds might be valued at.
I’m not saying that ETFs are perfect vehicles or anything of the kind. But the problem lies with the high-tech, algorithmic, flash-trading momentum strategies, not the various different vehicles to package securities that are available to investors.