Are ETFs safe?

[charliebrown]

This article seems to not be an attempt to induce panic. However I need to read it about three more times to decide if the logic is sound. Any comments?

Generally it says the problems are with short sellers and the ability of the sponsors to create baskets if they are under financial stress.

http://www.safehaven.com/article/205...fs-really-safe

[c1ue]

Re: Are ETFs safe?

The problem with ETFs is that they are extremely non-transparent.

A hedge fund or a mutual fund generally holds quantifiable securities.

ETFs all employ some level of derivatives - futures and what not. As these futures are incredibly volatile, the actual contents of the ETF thus are completely unquantifiable externally. They have to do so in order to relatively quickly lock up or sell securities/commodities as funds flow in/out of the ETF.

These derivatives also compound counter-party issues - the ETF generally doesn't itself hold the securities in question (due to the derivatives noted above) and so an AIG type situation would be...very bad.

[Glenn Black]

Re: Are ETFs safe?

My opinion is that ETF's are safe until they are no longer safe. Consider attending an illegal gambling operation operating in the basement of a warehouse downtown. If the House reneged on paying off a bet, they would immediately have 100% angry customers, and an end to their business. Since the place has never been raided by the authorities, and rumor has it that the authorities are turning a blind eye, and will not enforce the gambling laws against this club, as it's a "victimless crime", and quite profitable for the "donations" that are made by the club's owners and well-heeled patrons.

You visited once as an observer while a friend gambled. All seemed good, no problems. Next time you brought you're own pocket money and dabbled at the tables, coming home a small winner. Next you bring your paycheck and gamble heavily. A line of credit is opened up & now you have a lot of money on the table, far more than you can afford to lose.

Then all of a sudden, the competition of this House attacks to eliminates the competition, or the authorities raid the place, taking everything, including your bankroll, as evidence, or the House stings you, the stupid mark, with a loaded deck of cards or a rigged roulette wheel. Either way, you lose everything. Now what are you going to do? The banks that loaned you the money for illegal gambling hears what happened, and they start to legally squeeze you for your illegal losses. Go to the cops with a complaint, and they aren't interested, or charge you as a co-conspirator.

It's not a perfect analogy, but seems close to what ETF's are all about.

The wise guys play with ETF's and have immunity. They will eat you and thousands of others like you when it suits their purpose.

You won't be so lucky, unless you get in and get out quickly.

For bank robbers, I assume that everybody starts out that they will only rob one bank, then retire. In reality, nobody ever retires, they keep robbing banks until they are caught. You will be no different once you start playing with ETF's. Like Lay's potato chips, you can never eat just one.

ETF's are derivatives. There is huge counter-party risk. ETF's will cause or contribute to the volatility and probability of the coming market crash. Stay away from ETF's. They are made convenient and profitable (in the short run) for a reason, that brings in more suckers, maximizing the wise guy's profits.

[charliebrown]

Re: Are ETFs safe?

There was a comment in this article that says mutual funds are much safer from a clarity of ownership perspective.
Is this true?

So from a safety perspective it is better to own VFINX (Vanguard index 500 mutual fund) rather than VOO. (Vanguard 500 index ETF)

I'm not a big time investor, and need some diversification for single company failure perspective (Anderson, BP ...). I don't want to manage a portfolio of 20 or more stocks.

[BigBagel]

Re: Are ETFs safe?

I checked the Vanguard website regarding their Index 500 Mutual Fund. It says they can invest to a "limited extent" in derivatives. It also states that they may invest in ETF's. So even in a mutual fund you're going to get ETF and derivative exposure. I own some Vanguard funds and I'm no going to worry about this issue.
A good thing about mutual funds is that you can't buy and sell them immediately. That discourages hyper manic buying and selling. Another thing is they re-invest your dividends automatically so you get compounding without having to do anything.

[c1ue]

Re: Are ETFs safe?

I checked the Vanguard website regarding their Index 500 Mutual Fund. It says they can invest to a "limited extent" in derivatives. It also states that they may invest in ETF's. So even in a mutual fund you're going to get ETF and derivative exposure. I own some Vanguard funds and I'm no going to worry about this issue.
A good thing about mutual funds is that you can't buy and sell them immediately. That discourages hyper manic buying and selling. Another thing is they re-invest your dividends automatically so you get compounding without having to do anything.

Certainly all investment pools - whether hedge funds, mutual funds, or ETFs - may invest in derivatives.

However, mutual funds and hedge funds are designed for capturing and retaining money flows, while ETFs are really easy and quick ways in (and out) of a specific focus.

Thus it is very possible, even likely, that an ETF would have far greater exposure to derivatives because of the transitory nature of flows.

Secondly the mutual fund concept has been around for a long time and has a history and existing set of relatively well tested regulations.

ETFs are very new and do not.