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Are ETF's riskier than mutual funds in volatile markets?

Posted: Tue Feb 13, 2018 9:40 am
by Nowizard
We have stayed in mutual funds and never turned toward ETF's. During periods like this, mulling things over has resulted in wondering if that is a positive in terms of avoiding temptation to sell inappropriately during a day when the market is tanking. Do others believe that the ability to trade ETF's intra-day is a potential threat to the typical long term investor during periods of extreme volatility?

Tim

Re: Are ETF's riskier than mutual funds in volatile markets?

Posted: Tue Feb 13, 2018 9:43 am
by in_reality
If the market is tanking so much and you have fear it will never recover, what is stopping you from selling your mutual fund?

You might be able to exit a few hours earlier with the ETF, but how much difference would that really make?

I only have ETFs but am not tempted to trade on speculation.

Re: Are ETF's riskier than mutual funds in volatile markets?

Posted: Tue Feb 13, 2018 9:44 am
by Jack FFR1846
You're asking 2 questions.

1) Does your behavior put you at risk because you can't "just stand there"?

2) Do ETFs have some sort of evil risk element.

#1, you'll have to answer for yourself. If the answer is no, then it's also no for #2. I own ETFs at Schwab and TDAmeritrade for cost reasons and have never sold because of market conditions, ever. To me, there's no difference. When I opened my Schwab account, funds cost more than ETFs. They've now equalized but I like having exactly one fund to keep track of.

Re: Are ETF's riskier than mutual funds in volatile markets?

Posted: Tue Feb 13, 2018 9:47 am
by mega317
I think many have that view. I never fully bought it. Yes the trade doesn't execute immediately but you can click the sell button in the middle of the day. I suppose there is a slight advantage in that if the price goes back up intraday you can cancel the order. But I suspect that's not exactly what you asking about.

Re: Are ETF's riskier than mutual funds in volatile markets?

Posted: Tue Feb 13, 2018 10:01 am
by triceratop
No I do not believe that.

In fact I believe the reverse, somewhat stronger statement. If someone views the ability to sell intra-day as somehow impactful on or even tempting of their behavior during market volatility, then they are not a long term investor.

Re: Are ETF's riskier than mutual funds in volatile markets?

Posted: Tue Feb 13, 2018 10:14 am
by livesoft
Interesting perspective of "temptation to sell inappropriately during a day when the market is tanking." I always have the temptation to buy during a day when the market is tanking. That's why I have to have a rule that I don't have to buy on a Friday otherwise I would probably do it.

But I think we have to say that ETFs are riskier than mutual funds just because mutual funds have only a single day price and ETFs have many prices during the day. The standard deviation of a one-day price for a mutual fund is undefined (or zero) from its single transaction at the end of the day for everybody, while for an ETF you could calculate it from all the transactions during the day.

Re: Are ETF's riskier than mutual funds in volatile markets?

Posted: Tue Feb 13, 2018 11:19 am
by asif408
Nowizard wrote:
Tue Feb 13, 2018 9:40 am
Do others believe that the ability to trade ETF's intra-day is a potential threat to the typical long term investor during periods of extreme volatility?
No, I don't. It's only a potential threat if you're a short-term investor or speculator trying to make a quick profit in the middle of the chaos. For instance, the 10% or so drop up to this point should not have triggered any action for most long-term investors. If this is the depth of the drop, it will be a blip on the radar down the line. If markets drop another 10 or 20% then you might rebalance, which would be two transactions, selling the winner and buying more of the loser (if this applies). And you don't have to do this on the most chaotic days if you choose, it's not like every day is chaotic even during extreme volatility.

If not seeing the second-to-second change in prices helps you emotionally stay put, then yes, use mutual funds. But there is nothing intrinsically bad about ETFs for the long-term investor, because if you're long term you still won't be trading often, whether you own the ETFs or the mutual funds.

Re: Are ETF's riskier than mutual funds in volatile markets?

Posted: Tue Feb 13, 2018 2:57 pm
by Nowizard
The comments make sense based on the prevailing strategies of most of those posting here and are what one would expect. Since there is considerable data to suggest that many investors lower their return by excessive trading, I suspect that this could be the reason at least some individuals buy an ETF rather than the fund, even if it is only for the "possibility" of intra-day trading, probably selling, in the case of a perceived catastrophic market drop.

Tim