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What if my index fund is actually just buying and holding the underlying stock as opposed to just a price tracking entity? In that case not taker for my fund =

What if my index fund is actually just buying and holding the underlying stock as opposed to just a price tracking entity? In that case not taker for my fund = no taker for the underlying stock right? Will this not have the liquidity risk that Bury mentions?

secabeen 7y ago
The index fund is holding the underlying stock, largely. The challenge is that if say 5% of their fund holders sell their shares in the fund, the fund has to sell the underlying stock to generate the cash to pay out. Most funds have a rule in their documents that if you are a large fundholder (holding 1% or more of the fund) and you sell, they can hand you stocks directly rather than selling them and giving you cash, but that doesn't work it it's tens of thousands of small fund holders selling.
- wbl 7y ago
  So? They sell others buy. If I hear there is a squeeze and have cash I'll throw it in: who wouldn't? It's never the case that x٪ of the market can exit at once regardless of how it is owned.
  - joyjoyjoy 7y ago
    "If I hear there is a squeeze and have cash I'll throw it in:" For how many billions will you buy? And why did you not throw it in in 2008? "who wouldn't?" People who are leveraged? "It's never the case that x٪ of the market can exit at once regardless of how it is owned." You may not have heard it. But this is called a stock market crash. One is expected soon. So enjoy the ride and keep your money dry that you can "throw it in"
- vkou 7y ago
  So? If 5% of all stockholders sell their stock, that's going to cause a downward price movement, too. What is special about an ETF, that makes this situation any worse?
C1sc0cat 7y ago
They are mostly not doing physical replication (physically owning all the shares) but using synthetic means.
- 0xcafecafe 7y ago
  Not really. The most popular index funds physically invest their capital in the stocks making up the index: https://www.investopedia.com/articles/markets/101415/4-best-sp-500-index-funds.asp https://www.investopedia.com/articles/markets/101415/4-best-...
  - C1sc0cat 7y ago
    That wasn't what the Article being critiqued said though.
    - 0xcafecafe 7y ago
      Correct. There are index mutual funds and index etfs. The article seemed to refer the latter.
- FabHK 7y ago
  Source? In the jurisdictions I'm familiar with, synthetic ETFs come with special warnings (even in the fund name), and they're definitely not the majority.
lmm 7y ago
> What if my index fund is actually just buying and holding the underlying stock as opposed to just a price tracking entity? In that case not taker for my fund = no taker for the underlying stock right? Will this not have the liquidity risk that Bury mentions? In any crisis, the people who get really screwed are those who decide they have to sell, at any price. Instant liquidity - by whichever route - gets really expensive. An actively managed fund can at least decide which assets to sell to meet redemptions, holding those it thinks are undervalued at the moment. Whereas an index fund is effectively exposed to a crisis anywhere in the market.

secabeen 7y ago

The index fund is holding the underlying stock, largely. The challenge is that if say 5% of their fund holders sell their shares in the fund, the fund has to sell the underlying stock to generate the cash to pay out. Most funds have a rule in their documents that if you are a large fundholder (holding 1% or more of the fund) and you sell, they can hand you stocks directly rather than selling them and giving you cash, but that doesn't work it it's tens of thousands of small fund holders selling.

wbl 7y ago
So? They sell others buy. If I hear there is a squeeze and have cash I'll throw it in: who wouldn't? It's never the case that x٪ of the market can exit at once regardless of how it is owned.
- joyjoyjoy 7y ago
  "If I hear there is a squeeze and have cash I'll throw it in:" For how many billions will you buy? And why did you not throw it in in 2008? "who wouldn't?" People who are leveraged? "It's never the case that x٪ of the market can exit at once regardless of how it is owned." You may not have heard it. But this is called a stock market crash. One is expected soon. So enjoy the ride and keep your money dry that you can "throw it in"
vkou 7y ago
So? If 5% of all stockholders sell their stock, that's going to cause a downward price movement, too. What is special about an ETF, that makes this situation any worse?

C1sc0cat 7y ago

They are mostly not doing physical replication (physically owning all the shares) but using synthetic means.

0xcafecafe 7y ago
Not really. The most popular index funds physically invest their capital in the stocks making up the index: https://www.investopedia.com/articles/markets/101415/4-best-sp-500-index-funds.asp https://www.investopedia.com/articles/markets/101415/4-best-...
- C1sc0cat 7y ago
  That wasn't what the Article being critiqued said though.
  - 0xcafecafe 7y ago
    Correct. There are index mutual funds and index etfs. The article seemed to refer the latter.
FabHK 7y ago
Source? In the jurisdictions I'm familiar with, synthetic ETFs come with special warnings (even in the fund name), and they're definitely not the majority.

lmm 7y ago

> What if my index fund is actually just buying and holding the underlying stock as opposed to just a price tracking entity? In that case not taker for my fund = no taker for the underlying stock right? Will this not have the liquidity risk that Bury mentions? In any crisis, the people who get really screwed are those who decide they have to sell, at any price. Instant liquidity - by whichever route - gets really expensive. An actively managed fund can at least decide which assets to sell to meet redemptions, holding those it thinks are undervalued at the moment. Whereas an index fund is effectively exposed to a crisis anywhere in the market.