Are ETFs Safe?

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GratefulinNC
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Are ETFs Safe?

Post by GratefulinNC » Thu Feb 15, 2018 4:16 pm

Technology Investor just posted a cogent argument against ETFs at http://www.technologyinvestor.com/?p=41817.

What is your opinion?

PFInterest
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Re: Are ETFs Safe?

Post by PFInterest » Thu Feb 15, 2018 4:20 pm

VTI is VTSAX so yes.

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Alexa9
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Re: Are ETFs Safe?

Post by Alexa9 » Thu Feb 15, 2018 4:21 pm

If you're going to buy and hold them and not panic sell during a blip like the recent one, they're basically no different than mutual funds. The bid/ask spread you obviously have to be careful about in a crisis. If you're worried, mutual funds are probably better.

ImUrHuckleberry
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Re: Are ETFs Safe?

Post by ImUrHuckleberry » Thu Feb 15, 2018 4:23 pm

That article talks about the danger of derivatives and then seems to assume that all ETFs are derivatives, which I don't believe is the case.

livesoft
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Re: Are ETFs Safe?

Post by livesoft » Thu Feb 15, 2018 4:24 pm

I read the article. My opinion is that the ETFs that I use and the ETFs that many people on this forum might use are safe.

My rules about ETFs are simple:

1. Never own more than 5% of the average daily volume of any ETF.

That's it. I use limit orders, marketable limit orders, market orders, orders to execute at the market open, and orders in the last 15 minutes. I will break up a large order into several smaller orders with different limit prices, too. But for some ETFs with large average daily volumes, I won't break up orders. I am reasonably patient and do not have to have an order execute either.
Last edited by livesoft on Thu Feb 15, 2018 4:25 pm, edited 1 time in total.
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bling
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Re: Are ETFs Safe?

Post by bling » Thu Feb 15, 2018 4:24 pm

not all ETFs are the same. the big ones have an average spread of just 1 cent.

https://advisors.vanguard.com/VGApp/iip ... daskspread

desafinado
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Re: Are ETFs Safe?

Post by desafinado » Thu Feb 15, 2018 4:29 pm

TechnologyInvestor wrote:I started with ETFs. In my gut I saw these things as similar to auction rate preferreds. Now I know everyone and their uncle (including me) owns them. But they’re not stocks. They’re allegedly baskets of stocks managed by various and sundry financial institutions who may or may not turn up that day to ensure that my ETF is worth what it should be.
My understanding is that *greed* keeps ETFs safe. Some ETFs may trade at a discount or premium to their NAV, but when that occurs, it creates an incentive for arbitrageurs to bring the prices back together (by selling the components short and buying the ETF shares or vice versa). I don't think we should expect execution to be better or worse on average for ETFs than for stocks. The same rules of thumb should apply - more volume means more liquidity and better execution.

TechnologyInvestor might also be worried that ETF sponsors would refuse to trade with Authorized Participants (the arbitrageurs who keep prices in line) or that they might not actually hold the securities that the ETFs may represent. These concerns might be a little bit more interesting, and I leave them to someone more knowledgeable to answer.

1. Are ETF sponsors required to trade with APs? And if they aren't, are there any circumstances where their incentives would be against doing so?

2. What happens if for some reason the sponsor doesn't have the securities? For example, suppose a sponsor holds low-volume illiquid derivatives instead and is unable to get the underlying securities at the price they thought they could?

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oldcomputerguy
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Re: Are ETFs Safe?

Post by oldcomputerguy » Thu Feb 15, 2018 4:36 pm

GratefulinNC wrote:
Thu Feb 15, 2018 4:16 pm
Technology Investor just posted a cogent argument against ETFs at http://www.technologyinvestor.com/?p=41817.

What is your opinion?
Perhaps I read the article too quickly, but I didn't find it cogent at all. The entire argument in my opinion was a completely unsubstantiated attack on ETFs with no valid supporting facts. In fact, all I got from the article was "ETFs are bad!!! Run away!!!"

He did go on and on and on about preferred stocks, the 2008 financial crisis, and leverage, but I failed to see how any of that links to any inherent danger in ETFs.

Can someone explain it to me?
"I’ve come around to this: If you’re dumb, surround yourself with smart people; and if you’re smart, surround yourself with smart people who disagree with you." (Aaron Sorkin)

drk
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Re: Are ETFs Safe?

Post by drk » Thu Feb 15, 2018 4:40 pm

That post is a mixture of FUD and category errors. For example, this seems to be the crux of the "argument":
Think about this: Schwab sells billions of dollar of ETFs. Yet, they write “We don’t think they’re inherently dangerous.” Are they saying they’re just straight out plain dangerous? My brain screams YES.
Plopping references to Schwab ETFs alongside 2-and-20 hedge funds, derivatives, XIV, and marijuana ETPs is a nasty sleight of hand. Unless, of course, his allegation is that Schwab, Vanguard, and Blackrock are one and the same with the "various and sundry financial institutions" that sell products like XIV and MJX. If that's the idea, though, there needs to be a lot more than dishonest framing of a sentence from a post responding to accusations that ETFs (but really index funds) are dangerous. Notice that the blogger did not include a link to the Schwab post because it would have undermined that framing.

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triceratop
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Re: Are ETFs Safe?

Post by triceratop » Thu Feb 15, 2018 4:55 pm

Yes they are safe.

No it is not a cogent argument against ETFs. It's not even an argument per se, more of a rant and a conspiracy theory.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

Topic Author
GratefulinNC
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Re: Are ETFs Safe?

Post by GratefulinNC » Thu Feb 15, 2018 9:08 pm

Thanks everybody! I feel much better now. I appreciate all of your insight and knowledge.

There is so much fear porn on the Internet.

Stay the course.

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Lancelot
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Re: Are ETFs Safe?

Post by Lancelot » Thu Feb 15, 2018 9:12 pm

I'm a creature of habit and mostly use plain old Vanguard mutual funds since I rarely trade. I did liquidate my Vanguard Health care (Managed) during the recent market run up and will DCA back into VHT, using limit orders, and enjoy a 27BP reduction in fees. Many Vanguard ETFs have much lower fees than their comparable mutual fund :sharebeer
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