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The criticism is that they do not lead to efficient allocation of capital (the point of the stock market) but rather a feedback loop where the ETF fund has to b

The criticism is that they do not lead to efficient allocation of capital (the point of the stock market) but rather a feedback loop where the ETF fund has to buy TSLA and AMZN because they are in the top 500, and that makes them worth even more, keeping the in the 500s forever, and not because they produce value and were deemed a good choice by a professional investor that did his due diligence, but simply because of the ETF feedback loops.

dangus 5y ago
Maybe this is just a pedantic terminology thing, but what you're talking about is much narrower than the ETF. I think the image of an ETF you're seeing is of the S&P 500 index fund or total stock market index fund. However, an ETF is just a method of exchanging securities. There are thousands of ETFs in all kinds of different categories: https://etfdb.com/etfs/ https://etfdb.com/etfs/ I personally subscribe to the idea that the fears about passive indexes ruining the market with feedback loop economics are overblown. What they really did was bring down the cost of actively managed funds by providing competition. Not only that, in the post-Bogle world there are a lot of "hybrid" funds and robofunds that offer index-like expense ratios with more opinionated holdings than VTI.
- axiosgunnar 5y ago
  Ah yes you are absolutely right. I meant „stock index ETF“ when I said „ETF“. But then I believe the parent posters were also referring to index ETFs when they said „ETF“, so it‘s just us normies polluting the name spaces again :-)
quickthrower2 5y ago
If this is true it should be great for traders who are trading on performance/news/economy etc. when they made their profits they have an index fund wanting to buy their stuff so very liquid. But then such trading activity should allow price discovery and if not there is a gap for more traders

dangus 5y ago

Maybe this is just a pedantic terminology thing, but what you're talking about is much narrower than the ETF. I think the image of an ETF you're seeing is of the S&P 500 index fund or total stock market index fund. However, an ETF is just a method of exchanging securities. There are thousands of ETFs in all kinds of different categories: https://etfdb.com/etfs/ https://etfdb.com/etfs/ I personally subscribe to the idea that the fears about passive indexes ruining the market with feedback loop economics are overblown. What they really did was bring down the cost of actively managed funds by providing competition. Not only that, in the post-Bogle world there are a lot of "hybrid" funds and robofunds that offer index-like expense ratios with more opinionated holdings than VTI.

axiosgunnar 5y ago
Ah yes you are absolutely right. I meant „stock index ETF“ when I said „ETF“. But then I believe the parent posters were also referring to index ETFs when they said „ETF“, so it‘s just us normies polluting the name spaces again :-)

quickthrower2 5y ago

If this is true it should be great for traders who are trading on performance/news/economy etc. when they made their profits they have an index fund wanting to buy their stuff so very liquid. But then such trading activity should allow price discovery and if not there is a gap for more traders