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The ETF Files: How the U.S. government inadvertently launched a $3T industry

bloomberg.com

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Re: The ETF Files: How the U.S. government inadvertently launched a $3T industry

#31

Post by Jb6 »

chiph wrote: post #29

I'm still skeptical of ETFs as I see them as being a derivative product - not trading the original shares, but tickets representing them. So I see the same dangers/risks with them as with mortgage-backed securities. While I may be acting like an old fuddy-duddy, there is this: >Of the 1,278 securities halted for trading, 80 percent involved ETFs, according to the SEC.

The difference is in the leverage. MBS blew up the economy because the banks betting on them were very highly leveraged and had more obligations than they could realistically pay out. An ETF is more akin to a share of stock in a company. The worst it can do is go to 0 and lose all value. It won't result in a 30x loss like a derivative would.

Re: The ETF Files: How the U.S. government inadvertently launched a $3T industry

#32

Post by buzzdenver »

chiph wrote: post #29

I'm still skeptical of ETFs as I see them as being a derivative product - not trading the original shares, but tickets representing them. So I see the same dangers/risks with them as with mortgage-backed securities. While I may be acting like an old fuddy-duddy, there is this: >Of the 1,278 securities halted for trading, 80 percent involved ETFs, according to the SEC.

You own the real thing for example with SPY, which you can redeem to own the individual stocks. This of course cannot be true for all ETF-s, only the index funds.

Re: The ETF Files: How the U.S. government inadvertently launched a $3T industry

#33

Post by MagicWishMonkey »

dne wrote: post #23
anonymousDan wrote: post #22

Earlier quoted context omitted.

Can you clarify the difference between an index fund and an etf? I always thought they were synonymous.

ETF = investment fund traded on a stock exchange. Index fund = investment fund (mutual fund or ETF) that tracks an index, i.e. passively managed.

So is something like VSGAX an ETF or is it an index fund?

Re: The ETF Files: How the U.S. government inadvertently launched a $3T industry

#35

Post by digi_owl »

stygiansonic wrote: post #25

Aside: The article mentions the "portfolio insurance" strategy and "program trading" as causes of the October 1987 crash. Basically, the portfolio insurance strategy was common in the 1980's and was typically implemented through program trading. Portfolio insurance basically replicates a put option against some index, typically using index futures. The idea is that if you can't buy a put option against something, you…

> However, if everyone (or a substantial portion of the market) is following this same strategy, it could be bad.

Monoculture comes to mind...

Re: The ETF Files: How the U.S. government inadvertently launched a $3T industry

#36

Post by chiph »

mafribe wrote: post #30
chiph wrote: post #29

I'm still skeptical of ETFs as I see them as being a derivative product - not trading the original shares, but tickets representing them. So I see the same dangers/risks with them as with mortgage-backed securities. While I may be acting like an old fuddy-duddy, there is this: >Of the 1,278 securities halted for trading, 80 percent involved ETFs, according to the SEC.

not trading the original shares, That depends on the type of ETF. As far as I understand a "Physical ETF" does hold the securities of the index it follows. In contrast, "Synthetic ETFs" track an index using swaps and collateral.

I assume they disclose what type they are? Also, any idea what the ratio of synthetic ETFs to physical ETFs may be? If it's low, it's not a potential market problem.

Re: The ETF Files: How the U.S. government inadvertently launched a $3T industry

#37

Post by mafribe »

chiph wrote: post #36
mafribe wrote: post #30

Earlier quoted context omitted.

not trading the original shares, That depends on the type of ETF. As far as I understand a "Physical ETF" does hold the securities of the index it follows. In contrast, "Synthetic ETFs" track an index using swaps and collateral.

I assume they disclose what type they are? Also, any idea what the ratio of synthetic ETFs to physical ETFs may be? If it's low, it's not a potential market problem.

The ETFs I looked at do disclose this. I guess it's a legal requirement, since it affects risk structure. No idea about the ratio.

Re: The ETF Files: How the U.S. government inadvertently launched a $3T industry

#38

Post by thinkcontext »

"a $3T industry"

Not. $3T is the value of the assets held by the funds, the value of the industry is the expense fees. Its probably lower than that, if ETFs didn't exist some portion of that $3T would instead be held in mutual funds.

Re: The ETF Files: How the U.S. government inadvertently launched a $3T industry

#39

Post by dne »

MagicWishMonkey wrote: post #33
dne wrote: post #23

Earlier quoted context omitted.

ETF = investment fund traded on a stock exchange. Index fund = investment fund (mutual fund or ETF) that tracks an index, i.e. passively managed.

So is something like VSGAX an ETF or is it an index fund?

It's an index mutual fund[1] that is also available as an ETF[2].

1: https://personal.vanguard.com/us/funds/snapshot?FundId=5861&...

2: https://personal.vanguard.com/us/funds/snapshot?FundId=0938&...

Re: The ETF Files: How the U.S. government inadvertently launched a $3T industry

#40

Post by nkd »

mafribe wrote: post #30
chiph wrote: post #29

I'm still skeptical of ETFs as I see them as being a derivative product - not trading the original shares, but tickets representing them. So I see the same dangers/risks with them as with mortgage-backed securities. While I may be acting like an old fuddy-duddy, there is this: >Of the 1,278 securities halted for trading, 80 percent involved ETFs, according to the SEC.

not trading the original shares, That depends on the type of ETF. As far as I understand a "Physical ETF" does hold the securities of the index it follows. In contrast, "Synthetic ETFs" track an index using swaps and collateral.

It's worth noticing many "Physical ETF" lend the securities they hold, in order to increase the ETF performance.
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