In the last year, a torrent of money has flooded into Exchange Traded Funds (ETF’s) that track the stock market:

Over the last 12 months, about $650 billion has flowed into stock and bond ETF’s, a flow that’s unusually large versus history and may help explain why markets have been so strong.

Despite the attention to volatile stocks like GameStop, a far bigger firehose of cash is aimed at ETF’s. When investors buy ETF’s, fund managers have to buy the stocks in the index. If I buy an S&P 500 index fund from Vanguard, for example, Vanguard has to buy the 500 stocks in the index in proportion to how much of the index each comprises. This pushes up the stock market.

A big force behind this buying may be increasing personal income, partly due to COVID-related stimulus. With consumer balance sheets looking flush with cash, I expect this trend to support markets for the forseeable future.

Dig into these posts for more on markets:

• Short Sellers Have Abandoned the Stock Market
• Beware the SPAC Cliff
• The First Stock Trades On the Blockchain Just Happened

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Photo: “Huge wave” by bluesbby is licensed under CC BY 2.0