are ETFs really safe? Can an ETF "break"?

[grapejelly]

Today the news is huge withdrawals from European equity funds pretty much across the board.

I am wondering if ETFs are really safe. A lot of ETFs contain stocks that were very thinly traded before the growth of ETFs. And perhaps their asset values relative to the underlying assets could fluctuate more wildly than anyone imagines...could you break an ETF like you can "break the buck" on a money market fund?

[rabot10]

Re: are ETFs really safe? Can an ETF "break"?

Today the news is huge withdrawals from European equity funds pretty much across the board.

I am wondering if ETFs are really safe. A lot of ETFs contain stocks that were very thinly traded before the growth of ETFs. And perhaps their asset values relative to the underlying assets could fluctuate more wildly than anyone imagines...could you break an ETF like you can "break the buck" on a money market fund?

For god sake get a life

[c1ue]

Re: are ETFs really safe? Can an ETF "break"?

GJ,

Any fund can break a buck even with a positive trend - if they're playing games with execution.

If a fund thinks it knows its resource commodity better than its customers, it can try to make extra money by selling derivatives, by varying purchase dates and amounts, etc.

All you need is for enough of these to be wrong - at some point the theoretical external valuation can be tested by a run.

[Tulpen]

Re: are ETFs really safe? Can an ETF "break"?

Today the news is huge withdrawals from European equity funds pretty much across the board.

I am wondering if ETFs are really safe. A lot of ETFs contain stocks that were very thinly traded before the growth of ETFs. And perhaps their asset values relative to the underlying assets could fluctuate more wildly than anyone imagines...could you break an ETF like you can "break the buck" on a money market fund?

I do not understand your question what do you mean by breaking?

Many things can happen with an ETF which causes the price to divert from the NAV (net asset value) or IV (intrinsic value). Not every ETF is alike, the simple ones have a creation unit consisting of a bucket of domestic stocks. These typically should run close to their NAVs. If there is a shortage of units on each side of the trade arbitrageurs step in to create a balance. However ETFs like ultrashorts, oil based or international stocks are more complicated.

Ultrashorts typically use swaps to achieve a double inverse performance and creation units require additional cash. Even there the price typically tracks the NAV very close.

Oil ETFs iarea different story, as far as I know there are no ETFs that trace the spot price of oil. Oil ETFs track the futures price of oil one or more months into the future. For instance USO tracks the futures price of oil and because of that there are complications because the fund needs to frequently rollover its positions. USO is also sensitive to contango and backwardation. But even there the price tracks the NAV reasonably well.

An example where as ETF could be "broken" is perhaps the DCR and UCR pair. This ETF is almost like a forward type contract on oil. It is not tracking the NAV very well, this is partly due to liquidity but also due to the complications of it being an indefinite forward type contract. Contango and backwardation plays an even bigger role here than in the case of USO.

DCR can be very profitable though, one month ago I bought in the low 10s and currently it is trading in the mid 12s. Note that due to liquidity issues one should trade this ETF slowly by trading only during favorable bid/ask offers. One of the reasons that most of my short oil position is in USO instead.

Another example where the price and the NAV are out of whack is in the case of CAF, not strictly an EFT but a fund that represents a bucket of A shares traded on the Shanghai exchange. This fund consistently trades at a big discount from its NAV due to the fact that equivalent H shares on the Hong Kong exchange trade much lower than the A shares.

[touchring]

Re: are ETFs really safe? Can an ETF "break"?

I was wondering. Can gold ETF break? :confused:

[c1ue]

Re: are ETFs really safe? Can an ETF "break"?

I was wondering. Can gold ETF break? :confused:

Touchring,

Keep in mind the middle-man question:

Any deployment of money makes the assumption that the middlemen do not abuse their positions.

With mutual funds - it turned out there was abuse.

With public stock companies - the abuse is ongoing by management

With fixed income securities (MBS/CDO bonds) - the abuse was all up and down the chain

There is no reason to assume that the ETFs are necessarily immune to this phenomenon.

[Jim Nickerson]

Re: are ETFs really safe? Can an ETF "break"?

Touchring,

Keep in mind the middle-man question:

Any deployment of money makes the assumption that the middlemen do not abuse their positions.

With mutual funds - it turned out there was abuse.

With public stock companies - the abuse is ongoing by management

With fixed income securities (MBS/CDO bonds) - the abuse was all up and down the chain

There is no reason to assume that the ETFs are necessarily immune to this phenomenon.

Nice argument, seeoneyouee.

[touchring]

Re: are ETFs really safe? Can an ETF "break"?

With mutual funds - it turned out there was abuse.

With public stock companies - the abuse is ongoing by management

Thanks, this is what i fear most. The financial world is becoming scandalous.

[DemonD]

Re: are ETFs really safe? Can an ETF "break"?

Thanks, this is what i fear most. The financial world is becoming scandalous.

"becoming" scandalous? like it isn't and never was in the past lol.

[quigleydoor]

Re: are ETFs really safe? Can an ETF "break"?

Keep in mind the middle-man question:

Any deployment of money makes the assumption that the middlemen do not abuse their positions. . . .

There is no reason to assume that the ETFs are necessarily immune to this phenomenon.

I highly recommend David Swensen's Unconventional Success for a survey of the parasitism practiced by the financial securities industry, from mutual funds, to corporate bonds, to ETFs. It will help you avoid sleazy managers and whole sleazy asset classes!

[grapejelly]

Re: are ETFs really safe? Can an ETF "break"?

my question comes from equity ETFs for instance...they have to dump large amounts of formerly thinly traded securities and I'm wondering if something could happen that renders them much more illiquid than they seem...with mass redemptions going on but unable to dump their underlying assets because of a choked market...if that makes any sense.

[Tulpen]

Re: are ETFs really safe? Can an ETF "break"?

my question comes from equity ETFs for instance...they have to dump large amounts of formerly thinly traded securities and I'm wondering if something could happen that renders them much more illiquid than they seem...with mass redemptions going on but unable to dump their underlying assets because of a choked market...if that makes any sense.

It can certainly be the case that those who own creation units of ETFs want to get out and discover that those stocks are less liquid than they wished. However that is really not an issue for those who trade the ETFs. Only in the opposite case where there is a shortage of creation units could we get the situation of a boost in prices compared to the NAV.

[Finster]

Re: are ETFs really safe? Can an ETF "break"?

my question comes from equity ETFs for instance...they have to dump large amounts of formerly thinly traded securities and I'm wondering if something could happen that renders them much more illiquid than they seem...with mass redemptions going on but unable to dump their underlying assets because of a choked market...if that makes any sense.

I think Tulpen is right. The ETF is just a pass-through vehicle. You'd have the same issue whether a lot of investors wanted to dump a bunch of illiquid securities whether they owned them directly or through an ETF.