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Diversification is good for individual investors, but it's also a good way for an economy, or for a financial sector to hedge against systemic risks. So if ETF
by brownbat 11y ago
Diversification is good for individual investors, but it's also a good way for an economy, or for a financial sector to hedge against systemic risks.
So if ETFs are taking over, it may be an improvement overall, but it's worth thinking through the black swans, the new low probability high impact risks that this creates.
Bloomberg has had a few comments about liquidity risks for ETFs on their site and in the Odd Lots podcast.[0] On the other hand, they've made these comments for a few years now, so maybe this is a chicken little story. Or maybe it only kicks in under certain conditions, like if we saw interest rates, demand for goods, and inflation spike, people start moving to other investments, potentially causing a sudden run on funds that are stuck holding only bonds without any real returns or way to offload them?
[0] http://www.bloomberg.com/news/articles/2014-09-23/etf-liquidity-risk-a-concern-for-regulators-wilkins http://www.bloomberg.com/news/articles/2014-09-23/etf-liquid...
- x5n1 11y agoSo invest in a black swan fund.
- kuzmin 11y agothis is not how science works
- brownbat 11y agoBlack swan funds have been doing neat things. But I didn't mean to imply I'm concerned about this as an individual investor. I'm honestly not that concerned about it at all, because it seems like an unlikely problem. But to whatever extent I am, the question wouldn't be "how do I protect my own investments?" It would be, "how should we protect all the retirement savings across the country that are placed under passive management automatically?" To really answer that question though, we'd probably have to know the actual level of risk and the timing of any crisis, which aren't trivial questions.