I Really – Really – Don’t Think This Is A Good Idea: ETF Edition
Regular readers know I have very serious reservations about the rampant proliferation of ETFs.
In some instances (HY products) I can put my finger on exactly why (no liquidity for the underlying assets, a quarter of the float being used by institutions for daily liquidity needs, etc.), and in some instances (equity ETFs) I can't quite get there.
But what I do know is that if you step back from the unit creation/destruction process (which generally seems to be functioning well) and just abstrac
ETFs can be traded immediately like a stock while their out of favor predecessor Mutual Funds cannot. Does that imply less intraday liquidity such that a bad day could become a very bad day?
“ETFs can be traded immediately like a stock”… well see therein lies the problem. you’ve got ETFs trading without the underlying trading. so the conceptual question is always going to be what happens when the underlying is going crazy. and on August 24, 2015, I would contend we got the answer.
I tend to agree, especially if the underlying goes crazy. In the case of equity ETFs, my gut feel is that in the event of a large broad correction and with liquidity drying up, there will be a lot of pressure on market makers to stop a collapse. For me the question is would they be able to prevent it?
Wonderful. I read “Investing in ETFs (for Dummies)” today, under sunny spring skies, but remembered seeing something in your posts on Seeking Alpha about ETFs. Having wandered back, and read through your posts, and links therefrom, all I have to say is, “Holy Schnikeys!”. Thank you. I’ll try to disconnect from the secondary market and reconnect to the underlying securities Monday. Or maybe just the former…