To be fair, active funds present almost as much risk in that regard; that is, if investors are fleing stocks altogether en masse, actively managed funds will face heavy withdrawals too, which will force them to sell a lot of shares.
Actively managed funds can manage the turmoil a bit better, as they can choose which shares they sell, but in a market drawdown, it’s less than certain that they’ll have enough diversification to actually have more liquid shares to sell (and not all of their stocks down the drain).
A solution to this would be to make other asset classes more attractive for investors, or stocks less attractive. Debt having some real value/cost would be a beginning as it would take some leverage out of risk assets and change the investors assessment when choosing an allocation. Central banks have moved there somewhat but there’s no telling they intend to stay there and they’ve been very unwilling to give up on very low/negative interest rates for quite some time before.
That is to say, the best protection investors have is that they get to develop thick skins by facing real drawdowns once in a while. I see that as a feature rather than a bug.
The funds are just a tool, the investor behind it is the actual person who is doing the selling/buying.
An ETF provider doesn’t even have any control about the price (it never buys or sells the underlying, it only exchanges baskets of equity).
edit: I think ETFs are just a convenient way to trade a tiny fraction of the whole market at a time, but as an ETF holder, it’s pretty much as if you were holding those fractional shares for real.
Did quite some thinking on the video and concluded that the guy just doesn’t know what he was talking about. Would be interesting to see if Ben Felix actually commented on the Video? His remarks in the Video were mainly to keep the guy talking but he didn’t re-confirm anything.
Why I think the guy had no clue? Just two examples:
Liquidity on ETF: Asking for ETF to hold liquidity demonstrates he doesn’t understand how ETF are redeemed. It made a bit more sense if he commented that Market Makers didn’t hold liquidity, but even then that wouldn’t make much sense.
Concentration from Large Cap Representation and Small Cap Sampling: Yes it is right that smaller Shares are as a tendency sampled, whereas larger shares were generally fully replicated in ETF. But unless ETF systematically under-weight small caps, the sampling of the individual ETFs equals itself out.
There is more examples, but I would recommend to both take this video as “interesting” and see if Ben Felix jumps on the train or not. I doubt he would…
It is alright to not agree with someone. However, I believe it is not fair to say that he does not know what he is talking about.
Regarding the comment about liquidity. I think you need to consider, there are two different situations.
You are talking about ETF liquidity where people simply trade ETFs between each other. This is like trading stocks. This kind of liquidity is managed by market makers. Michael Green is not talking about it
When there is a net inflow into the und, the Fund manager is required to create additional units (this means they need to go and buy underlying stocks) and similarly when there is a net outflow, fund manager need to sell underlying units to give back money to the investors. This is what Michael green is talking about. If Index fund is a large part of the total ownership of companies, and if they get forced to sell without being able to moderate it , this can cause a problem in stock prices. I do not think he is saying this is already a situation. He is warning that this could become like this.
There was a large discussion before and after the podcast episode in the Rational Reminder Forum.
Ben is definitely not agreeing with the conclusions Mike makes.
ah puh, good to know. Didn’t see these conversations. So then I can be more calm again. There were a few hours where I was quite panicky and thinking if it could be that I was wrong for such a long time.
Always good to challenge one’s believes but probably not this time
Thats exactly the problem. ETF do not buy or sell stocks, they are not mutual funds. ETF do not have this complexity. They only trade “Baskets of representative Shares” with “ETF Units” and all the buying and selling was a problem for the Market Makers. This is why I state that this guy probably didn’t know what he was talking about. But point taken, my choice of words probably was a bit harsh
Alright.
I still think that he had a valid point. There is nothing to panic but regulators should avoid a panic situation
What we need to be aware of is following
Active managers would always try to poke holes in index investing
BUT , Index investing providers are now very large and they are going to always deny any arguments from Active side. This doesn’t always mean Active managers are wrong
We have moved beyond the days when Active funds were big and index funds were new comers. Now tables have turned and we need to be more critical of the index funds as well.
P.S -: I am 100% invested in index funds. So I obviously don’t want him to be right at least as long as i am alive
Agree with you here, particularely proxy voting is a bit of a challenge I see. There is more and more money invested in ETF; meaning that the ETF Holders can no longer exercise their voting powers. I think it was about time to establish some kind of meaningful proxy voting where I can still, based on the ETF shares I hold, partially vote on behalf of the ETF.
I think I agree with TeaGhost.
What happens if you buy VT is that you give money to someone who sells it. Nothing happens at Vanguard. If suddenly almost everyone sells VT, the price of VT will go down, but the actual value will stay the same (eg NAV stays 107 but the ETF costs 50).
The only problem “inside” VT/Vanguard can happen if the have to suddenly sell a lot of stocks because they have fallen out of the index (FTSE All Global blabla). This again means only that the fund lost some money. On the other hand, if they have to buy a Stock (or several) because they are suddenly in the index and don’t have enough money to buy it, they have a problem.
There is market makers that take part in the selling and buying of fund shares.
When you buy VT, a market maker can create shares and sells those to you.
The NAV of VT will never deviate much from its market price, because that‘s an arbitrage opportunity for market makers and they will use that opportunity.
Yes but I think what @ma0 means, and with which I agree, is that in case of a liquidity event, ETFs would not be forcing that event to happen or making it worse: at worst, arbitrage would become less efficient and the trading price of the shares would temporarily deviate from the NAV. This should then settle down when the liquidity event is resolved and the shares price of the ETF should then join the NAV again.
99.99% of the ime, the NAV and shares price won’t significantly deviate. ETFs won’t be a trigger or catalyst for the kind of dramatic events that Michael Green seems to be trying to put on indexing. The liquidity problem he points to concerns traditional mutual funds (not ETFs), both passive and active. He doesn’t point the finger at the right problem and that, in itself, is a problem (when it comes to people having income tied to the success of active investing).
I’m not sure that anyone will really try to align NAV and price of an ETF. I know, the underlying stocks are worth the NAV value and you buy them at discount, but it’s not like you can go to Vanguard and ask for a conversion to the actual stocks. The price can theoretically stay for years at 50% of the NAV and nothing will happen, IMHO. I might be wrong though.
Going to Vanguard and asking for a conversion to the actual stocks is exactly (in essence) what authorized participants do: they are authorized to create shares of the ETF by providing the corresponding basket of stocks and reversely, to take the basket of stocks out of the fund by destroying the corresponding share.
If they can sell the underlying stocks for more than their price to acquire an ETF share, they’ll buy ETF shares and sell the stocks until the prices converge and they can’t do that profitably anymore. If, on the contrary, they can buy the underlying stocks for less than they can sell an ETF share, they’ll buy the stocks, turn them into an ETF share and sell the shares.
Unless greed exits the thought process of for profit financial trading institutions, they’ll keep doing that until the prices are aligned.
If the passive funds keep growing then talks from Michael Green would start making sense. And then it might not be Ponzi scheme but can cause a similar effect
I hope active funds and active investors can hold their ground and keep market balanced.
By reading and partipating to this forum, you confirm you have read and agree with the disclaimer presented on http://www.mustachianpost.com/
En lisant et participant à ce forum, tu confirmes avoir lu et être d'accord avec l'avis de dégagement de responsabilité présenté sur http://www.mustachianpost.com/fr/
Durch das Lesen und die Teilnahme an diesem Forum bestätigst du, dass du den auf http://www.mustachianpost.com/de/ dargestellten Haftungsausschluss gelesen hast und damit einverstanden bist.
