Are ETFs Really That Safe?

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uberational44
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Are ETFs Really That Safe?

Post by uberational44 » Thu Jan 18, 2018 4:24 pm

ETFs are normally lumped with index funds as fairly safe investments, but ETFs seem far more dangerous. Even Bogle warned about them

What do other people think?

I want exposure to robotics stocks through an ETF, but I'm not sure how happy I would be with my cash parked in one
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greg24
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Re: Are ETFs Really That Safe?

Post by greg24 » Thu Jan 18, 2018 4:26 pm

ETFs are probably safer than a sector bet on robotics.

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Alexa9
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Re: Are ETFs Really Safe

Post by Alexa9 » Thu Jan 18, 2018 4:26 pm

ETF's are safe assuming we're talking about Vanguard Index ETF's. An Outer Mongolian Robotics ETF is different :wink: You just have to be aware of the bid/ask spread which isn't a problem for highly traded funds. In fact, if you want to get out of the market quickly intraday they are superior but that's rarely/never needed.

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Re: Are ETFs Really That Safe?

Post by integrity » Thu Jan 18, 2018 4:33 pm

I guess it would depend on what stocks are held in the ETF.

I currently hold VTI in my taxable account. This is Vanguard's Total Stock Market ETF. I feel pretty good about it.

Here's another ETF: SLVP http://www.etf.com/SLVP. This one tracks companies that earn their revenue from silver mining. Pretty specific. Just substitute "silver mining" for "robotics" in your case. Would you want to make such a narrowly-focused bet on a sector? This one had a volatility of nearly 50% in 2017.

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Re: Are ETFs Really That Safe?

Post by rustymutt » Thu Jan 18, 2018 4:39 pm

If you buy and hold, what difference does it possibly mean? Oh, that you could sell in a midday crisis crash if desired to. That's way better than mutual funds my friend. If you're a consistent, steadfast, buy and holders, and only for retirement purposes w/d anything, they have way more benefits, than cons. I rest my case. Next. :sharebeer

2 hours of early trading benifit in a falling market can mean hundreds of thousands of dollars over a lifetime of investing. It's not a trivial amount. It's why people are willing to pay more to active managed funds, and etfs. I'm into indexes and don't fret the little things, but cost savings is in no way a little benefit. .18er with nearly all ETFs
Last edited by rustymutt on Thu Jan 18, 2018 4:44 pm, edited 2 times in total.
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Re: Are ETFs Really That Safe?

Post by uberational44 » Thu Jan 18, 2018 4:41 pm

Volatility is definitely not a problem, nor is a sector best as long as the demographics look relatively solid. For robotics, I think they do. My main issue would be complex and scary derivatives within the ETFs, or the actual ETF companies themselves...

Also, I wouldn't be narrow investment if I bought it with other stocks! :D
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Re: Are ETFs Really That Safe?

Post by lack_ey » Thu Jan 18, 2018 4:45 pm

I take it that this is a question about the ETF structure rather than a question about ETFs generally, correct?

What would constitute not being safe to you? What kind of danger are you thinking about? Most ETFs are '40 Act investment funds, same as traditional mutual funds, with all of the regulatory checks and requirements that entails. If you're expecting to always get trade execution at NAV, no, that's not how the market works. But certainly the share creation/redemption process usually keeps that tracking relatively tight, a lot more so than you see with closed-end funds.

Could you clarify more about what you think is dangerous? Would you say that mutual funds are similarly dangerous?

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Re: Are ETFs Really That Safe?

Post by alex_686 » Thu Jan 18, 2018 4:48 pm

From a structural view point ETFs are exactly as safe as mutual funds. They fall under the same regulations and operate mostly the same. There is a difference on how shares are created and destroyed but there is nothing dangerous about that.

Bogle's reference was not specific to ETFs but rather to investors. Mutual funds can only be bought at the end of the day, ETFs trade all day long. Thus if you hold ETFs you might be more tempted to day-trade and time the market, which are no-nos around here. However if day trading does not tempt you then there are no issues with ETFs.

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Re: Are ETFs Really That Safe?

Post by KATNYC » Thu Jan 18, 2018 5:22 pm

ETF Tax Efficiency
ETF’s are more tax effective than mutual funds. An ETF’s ability to decrease or avoid capital gain distributions comes from two differences: Unlike mutual-funds where shares are redeemed with the Fund directly, ETF’s are traded on an exchange just like a stock. When one party sells the ETF and another buys on the exchange so the underlying securities within the ETF are not sold to raise cash for the redemption, therefore no gain- no tax. The redemption process also enables the fund manager to sell the most effective cost-basis stocks through stock transfers during the redemption or creation process. These characteristics can also mean a difference in the after-tax rate of returns from a mutual fund versus an ETF, even when they both replicate the same underlying index.

https://www.forbes.com/sites/feeonlypla ... 59b42518ac

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Re: Are ETFs Really That Safe?

Post by bubbly » Thu Jan 18, 2018 5:40 pm

There are some short term bond ETFs available from Vanguard. Those look pretty safe to me.

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Re: Are ETFs Really That Safe?

Post by destin » Thu Jan 18, 2018 5:43 pm

I'm not sure how everyone has this much confidence in ETFs but I think the real answer is, we don't know. EFT's haven't been tested in extreme market volatility. It's right there in the prospectus next to the flag.

So until a major crash happens and some of the "Creation Unit" banks go bankrupt, we won't know how safe ETF's really are.

ETF's are not valueless though. They represent something. So they are always worth something. I like them. But it's a good idea to understand what they are and what your buying before buying them.

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Re: Are ETFs Really That Safe?

Post by triceratop » Thu Jan 18, 2018 5:47 pm

destin wrote:
Thu Jan 18, 2018 5:43 pm
I'm not sure how everyone has this much confidence in ETFs but I think the real answer is, we don't know. EFT's haven't been tested in extreme market volatility. It's right there in the prospectus next to the flag.

So until a major crash happens and some of the "Creation Unit" banks go bankrupt, we won't know how safe ETF's really are.

ETF's are not valueless though. They represent something. So they are always worth something. I like them. But it's a good idea to understand what they are and what your buying before buying them.
A major crash like 2008? Many ETFs did just fine then? In fact the real structural problems with ETF markets were not revealed in the 2008 crash at all.
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Re: Are ETFs Really That Safe?

Post by alex_686 » Thu Jan 18, 2018 6:03 pm

destin wrote:
Thu Jan 18, 2018 5:43 pm
I'm not sure how everyone has this much confidence in ETFs but I think the real answer is, we don't know. EFT's haven't been tested in extreme market volatility. It's right there in the prospectus next to the flag.

So until a major crash happens and some of the "Creation Unit" banks go bankrupt, we won't know how safe ETF's really are.
First, what language are you talking about? I can't think of anything like that.

Second, I think you comment on "Creation Unit" banks are off on two points. The units in the banks are middle men engaged in riskless arbitrage. Think of them as a utility. Neither 2001 nor 2008 had a major impact here. There were some edge cases but real culprit here was the wacky underlying assets these ETFs had. Plus, anything a mutual fund can do a ETF can do backwards and in high heels. Just like a mutual fund they can go directly into the market and buy and sell the underlying assets and create and destroy shares just like a mutual fund. Normally they don't - why would they?

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Re: Are ETFs Really That Safe?

Post by Captain kangaroo » Thu Jan 18, 2018 7:33 pm

Bogels dislike for etfs comes from the human investor error, not the etfs structure.

destin
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Re: Are ETFs Really That Safe?

Post by destin » Thu Jan 18, 2018 7:36 pm

triceratop wrote:
Thu Jan 18, 2018 5:47 pm
destin wrote:
Thu Jan 18, 2018 5:43 pm
I'm not sure how everyone has this much confidence in ETFs but I think the real answer is, we don't know. EFT's haven't been tested in extreme market volatility. It's right there in the prospectus next to the flag.

So until a major crash happens and some of the "Creation Unit" banks go bankrupt, we won't know how safe ETF's really are.

ETF's are not valueless though. They represent something. So they are always worth something. I like them. But it's a good idea to understand what they are and what your buying before buying them.
A major crash like 2008? Many ETFs did just fine then? In fact the real structural problems with ETF markets were not revealed in the 2008 crash at all.
The prospectus seems to imply that if the banks who buy and sell the Creation Unit were to go bankrupt or have cash problems, then we would have trouble getting the ETF NAV value. I'm not sure Lehman Brothers was a big ETF player. But if a big ETF player were to go bankrupt, who knows if there's enough other players with enough cash to fill in for them?

Vanguard Total Stock Market ETF Prospectus page 75,76 (pdf 80, 81).

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Re: Are ETFs Really That Safe?

Post by aqan » Thu Jan 18, 2018 7:42 pm

Whoever told you that.. ask them about the ‘safe’ upcoming bitcoin ETF.

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Re: Are ETFs Really That Safe?

Post by grog » Thu Jan 18, 2018 8:13 pm

Mr Bogle has no objection to buying and holding something like VTI. His criticisms are primarily 1) that they can be traded frequently, 2) the explosion of a lot of very narrow ETFs. He thinks those are marketing hype and won’t be around long. A robotics ETF is exactly the kind of thing he would dislike.

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Re: Are ETFs Really That Safe?

Post by GerryL » Thu Jan 18, 2018 11:09 pm

grog wrote:
Thu Jan 18, 2018 8:13 pm
Mr Bogle has no objection to buying and holding something like VTI. His criticisms are primarily 1) that they can be traded frequently, 2) the explosion of a lot of very narrow ETFs. He thinks those are marketing hype and won’t be around long. A robotics ETF is exactly the kind of thing he would dislike.

https://youtu.be/zrCo0m5gSfc
I seem to recall hearing Bogle say at the 2016 Boglehead Conference, "There is nothing wrong with exchange trade funds ... as long as you don't trade them."

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Re: Are ETFs Really That Safe?

Post by junior » Thu Jan 18, 2018 11:15 pm

grog wrote:
Thu Jan 18, 2018 8:13 pm
Mr Bogle has no objection to buying and holding something like VTI. His criticisms are primarily 1) that they can be traded frequently, 2) the explosion of a lot of very narrow ETFs. He thinks those are marketing hype and won’t be around long. A robotics ETF is exactly the kind of thing he would dislike.

https://youtu.be/zrCo0m5gSfc
William Berstein sugggest only investing in ETFs with over 200 million dollars in assets for this reason:

https://www.barrons.com/articles/the-cr ... 1378532993

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Re: Are ETFs Really That Safe?

Post by whodidntante » Thu Jan 18, 2018 11:35 pm

ETFs that target a very thin slice of the global market are non-diversified, and can move in a big way with events that impact that thin slice. But that's a good thing if you wanted to buy the thin slice, isn't it? :wink:

Fledgling ETFs that do not attract significant AUM have high closure risk. If the fund is liquidated, your broker might charge a fee, and you might have a taxable event. However, fledgling mutual funds have exactly the same risk.

Thinly traded ETFs are a pain to trade, at least if you actually want a fair price (close to NAV).

But I think Bogle doesn't like them because he thinks people can't control themselves and will trade too much. And probably because he was offered a chance to be a trailblazer in ETFs and he passed on the idea, then ETFs became huge.

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Re: Are ETFs Really That Safe?

Post by TD2626 » Fri Jan 19, 2018 12:43 am

A big concern is the fact that many etfs are small and/or concentrate on tiny sectors of the market. Also, they allow short term speculation. Responsible buy and hold investors tend to dislike narrow sector bets and short term trading. I guess in a sense etfs could be unsafe in the wrong hands (e.g. when used by people with unhealthy predispositions to short term trading).

Long term buy and hold investment in things like Vanguard's broad market ETFs are probably just as risky (or safe) as the roughly equivalent Vanguard mutual funds. There are major differences under the hood in how etfs vs traditional funds work, though and one could imagine (probably unlikely) scenarios where that could make an impact.

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Re: Are ETFs Really That Safe?

Post by Ragnoth » Fri Jan 19, 2018 1:37 am

Although Bogle has said a lot of negative things about ETFs over the years, it's mostly a response to the proliferation of high-fee garbage funds trying to lure in speculators. For people tempted to day-trade a NASCAR themed "index fund" (or a Nicaraguan-Hedged-Value fund, or a Things-Mentioned-On-Twitter fund), sticking to mutual funds might slow the bleeding.

But if you're simply a well-informed investor hemming and hawing over VTSAX vs VTI, I don't think anybody could reasonably hold it against you either way.

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Re: Are ETFs Really That Safe?

Post by boglerdude » Fri Jan 19, 2018 2:14 am

So if an ETF needs to liquidate it can sell the underlying assets to everyone on the open market?

ie not get held hostage or exploited by the handful of "authorized participants"?

edit1: http://wallstreetonparade.com/2015/12/p ... ega-banks/

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Re: Are ETFs Really That Safe?

Post by Jack FFR1846 » Fri Jan 19, 2018 8:49 am

I don't get the fear of ETFs. Take VTI and VTSAX. One is beer in an aluminum can and the other is beer in an aluminum bottle.

If you're talking about buying some thinly traded botique ETF that trades 8 shares a day, then ok.....don't buy that one. In like manner, don't buy a mutual fund that trades 8 shares a day.
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Re: Are ETFs Really That Safe?

Post by nisiprius » Fri Jan 19, 2018 9:21 am

uberational44 wrote:
Thu Jan 18, 2018 4:24 pm
ETFs are normally lumped with index funds as fairly safe investments, but ETFs seem far more dangerous. Even Bogle warned about them

What do other people think?

I want exposure to robotics stocks through an ETF, but I'm not sure how happy I would be with my cash parked in one
I hate ETFs. I don't use them. Just a personal thing. But I think they are just about as safe as mutual funds. If we're talking about black swans, really extreme can't-anticipate them catastrophes, the kinds that might affect ETFs might be different from mutual funds but you can't really judge relative safety. ETFs are highly regulated products, much more transparent, much safer from "shenanigans" than, say, hedge funds or crytpocurrency.

The idea of "parking cash" in something suggests near bank-like safety... let's say, we don't expect them ever to be "down" more than 5% from a smooth growth line. Very few ETFs or mutual funds have that degree of safety. Nothing that is based on stocks has that degree of safety. And a narrowly focussed ETF like "robotics stocks" isn't safe for "parking cash" at all. Nothing to do with its being an ETF, just with it's being based on a) stocks, and b) an undiversified portfolio of stocks.

I could imagine "parking cash" in a short-term bond index ETF like BSV, but given current bank account rates in the highest-rate savings account, I think the bank account would make more sense.

Index funds aren't all that safe. It's a relative thing The thing about a broad index fund, like a Total Stock Market fund, is that you are left with the considerable risks of the stock market as a whole, itself. It does relieve of the risks of being undiversified, and from "manager risk" (the risk of picking stocks and being wrong).
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Re: Are ETFs Really That Safe?

Post by Call_Me_Op » Fri Jan 19, 2018 9:49 am

uberational44 wrote:
Thu Jan 18, 2018 4:24 pm
ETFs are normally lumped with index funds as fairly safe investments, but ETFs seem far more dangerous.
Seem more dangerous in what respect? Bogle's concern is that people will trade them too much, but nobody will force you to trade your ETFs.
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Re: Are ETFs Really That Safe?

Post by alex_686 » Fri Jan 19, 2018 2:59 pm

boglerdude wrote:
Fri Jan 19, 2018 2:14 am
So if an ETF needs to liquidate it can sell the underlying assets to everyone on the open market?

ie not get held hostage or exploited by the handful of "authorized participants"?

edit1: http://wallstreetonparade.com/2015/12/p ... ega-banks/
It can. Back in 2008 a few ETFs did this. They were small - both in Assets Under Management and Shares Traded - and the underlying assets with illiquid. These were a prelude to these funds shutting down.

On a wider scope, all mutual funds have language and market crisis since 9/11. ETFs mention the banks because that is their main way of interacting with the market. Also, most of the authorized creation entries and both FDIC banks and prime brokers. They are low risk back room of the market. If these got shut down the market as a whole would be in a whole heap of trouble. Think electric or sewer. When Enron got shut down this did not mean they stopped producing electricity or pumping water. As 2008 showed it can be unpleasant. I just can't see any event that would hit ETFs that would not hit mutual funds just as hard.

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Re: Are ETFs Really That Safe?

Post by jeffreyalan » Thu Jul 19, 2018 7:01 pm

How does everyone feel about Treasury ETFs as a place to park cash for 1-2 years? Maybe SHV or TFLO?

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Re: Are ETFs Really That Safe?

Post by danielc » Thu Jul 19, 2018 8:38 pm

uberational44 wrote:
Thu Jan 18, 2018 4:24 pm
ETFs are normally lumped with index funds as fairly safe investments, but ETFs seem far more dangerous. Even Bogle warned about them
I have never heard anyone claim that either ETFs or index funds are safe investments. Most ETFs, like most index funds, invest in stocks. Stocks are not safe. I might go as far as to say that the term "safe investment" is a contradiction because, if something is safe, its return is probably low enough that you should not think of it as an investment. For example, I see T-bills and money market accounts as safe instruments, but I will be lucky if my money can even keep up with inflation.

An ETF is neither safer nor less safe than an equivalent index fund that invest in the same instruments in the same proportions.

uberational44 wrote:
Thu Jan 18, 2018 4:24 pm
I want exposure to robotics stocks through an ETF, but I'm not sure how happy I would be with my cash parked in one
Stocks are never a place wher eyou "park cash". Stocks will go up and down in value. If you need it as cash, put it in a money market account or something similar.

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Re: Are ETFs Really That Safe?

Post by jhfenton » Fri Jul 20, 2018 7:05 am

jeffreyalan wrote:
Thu Jul 19, 2018 7:01 pm
How does everyone feel about Treasury ETFs as a place to park cash for 1-2 years? Maybe SHV or TFLO?
They don't look dangerous, but I don't see that they offer anything compelling compared to Vanguard's money market funds:

VMFXX (Vanguard Federal MM)(sweep account) - 1.85% SEC Yield
VMMXX (Vanguard Prime MM) - 2.05% SEC Yield

SHV (iShares Short Treasury Bond ETF) - 1.91% SEC Yield
TFLO (iShares Treasury Floating Rate Bond ETF) - 1.75% SEC Yield

Both Vanguard MM funds have outperformed SHV with less (i.e. zero) volatility.

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