Carl Icahn says there's a dangerous bubble in the hottest investment products on the market

Billionaire investor Carl Icahn told
"Passive investing is the bubble right now, and that's a great danger," he said.
The recent drop in stocks is "just the beginning of rumblings of an earthquake," he said, adding that it's fruitless to try and predict the next crash.

Billionaire investor Carl Icahn said Tuesday that the selloff in stocks exposed problems with passive investment vehicles that have become popular with investors.

"You need regulation on this stuff," Icahn told CNBC about products including exchange-traded funds and notes, that have become popular on Wall Street. For example, he said, triple-levered ETFs that offer triple the returns of the performance of an underlying index shouldn't be available for purchase in this market.

The market for ETFs saw combined US assets hit $3.4 trillion in December, a roughly $876 billion single-year increase, according to Investment Company Institute data.

The most prominent casualty of this week's selloff was the VelocityShares Daily Inverse VIX Short-Term ETN, or XIV, which allowed traders to bet on lower volatility. Credit Suisse announced earlier on Tuesday that it was closing trading on the exchange-traded note, after its value plunged as the CBOE's volatility index had its biggest jump ever. TProShares Short VIX Short-Term Futures ETF

"Passive investing is the bubble right now, and that's a great danger," he said. Icahn added that low interest rates have pushed investors into passive funds, although the Federal Reserve should not be blamed for doing its part to stimulate the economy.

He said the stock market's drop was "just the beginning of rumblings of an earthquake," adding that it was fruitless to try and predict the next crash.

Stocks whipsawed on Tuesday after a 6% decline over the last three days that took the S&P 500 negative for the year.

"I think this thing will probably bounce back," Icahn said about the stock market. "However, I'm saying this is a manifestation of a real, deep problem that we have in our markets with ... index funds."

Passive investment vehicles like index funds are popular because investors don't realize how dangerous they can be, Icahn said.

"Today you have these triple-leveraged ETFs that are crazy," he said. "You have these index funds with leveraged ETFs against them, where, I don't see any difference between that and 1929."