Not only can spreads increase, but your ETFs could also start trading at a discount.TS1 wrote:Spreads on the major Vanguard ETFs are very small now, but I was wondering if an investor with a time horizon of decades might have any reason for concern over whether those spreads might not always be such.
natureexplorer wrote:The scenario does not have to be predictable to be possible.nisiprius wrote:What's the scenario under which an ETF could become so illiquid so quickly that selling it would involve a serious hit to your portfolio?
tetractys wrote:For lay investors, trading ETFs with GTC orders pretty much makes any worry about spreads a mute point. -- Tet
grabiner wrote:These orders have a different risk. Suppose that you place a Good-Till-Cancelled order on Wednesday to sell your ETF at a limit $50. It happens not to sell, with a closing value of $49.90. While the market is closed, something happens to raise stock prices. On Thursday, the market opens up 2%, so the opening value is $50.90; your order is still around, so a trader takes the $50 order and you sell for 90 cents less than the market value.
Sure, but remember we are talking concerns specific to ETFs. Liquidity of ETFs. If all the market in general crashes and trading is suspended or whatever, then everything crashes, ETFs, traditional mutual funds, individual stock portfolios. That's a market issue, not an ETF-specific issue.JamesSFO wrote:I will just add that when markets fail they are capable of doing so rather spectacularly and severely. Eventually it will likely correct, but eventually may be the wrong time horizon for you.natureexplorer wrote:The scenario does not have to be predictable to be possible.nisiprius wrote:What's the scenario under which an ETF could become so illiquid so quickly that selling it would involve a serious hit to your portfolio?
All ordinary trades must execute within the NBBO (national best bid and offer). A trader is not allowed to execute your sell order at less than national best bid during market hours (and I'll note GTC orders are only valid during regular market hours).
nisiprius wrote:The concern here is about a situation in which individual stocks are still liquid, mutual funds can still sell their shares to meet redemptions, and yet ETFs would become illiquid and/or trade at a steep discount.
I'm not even sure how to fantasize about that. Someone finds some very serious software bug that affects ETFs but nothing else, and all ETF trades are frozen for weeks while they rewrite the software, and meanwhile you cannot sell your ETFs but a few sharp operators are willing to lend you an advance on your ETF at usurious rates? If not that, what exactly is the ETF-specific black swan scenario we are talking about? Maybe the ETF provider fails and there's nobody around to create the "creation units?"
baw703916 wrote:All ordinary trades must execute within the NBBO (national best bid and offer). A trader is not allowed to execute your sell order at less than national best bid during market hours (and I'll note GTC orders are only valid during regular market hours).
But what happens at 09:30:00.001? For an illiquid ETF, it may be the case that the market maker hasn't put anything in the order book yet, or that there's a huge imbalance. So somebody with HFT capabilities could put in a bunch of lowball bids on the off chance that some of them might execute.
Default User BR wrote:There are any number of unlikely events that could happen. The question is whether you want to spend any time worrying about these or take measures against them.
When driving to work, there is a slight chance that some idiot will throw a rock off an overpass and kill me. I know it can happen because it has to other people. So, should I reroute my trip to avoid driving beneath overpasses? What other risks would I add by doing so?
A spiral of worry is no way to live. There is ALWAYS something that can paralyze you with fear.
natureexplorer wrote:The question for me is what risk do mutual funds have that ETFs don't.
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