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comment by mk
mk  ·  1661 days ago  ·  link  ·    ·  parent  ·  post: Ben Carlson: Debunking the Silly “Passive is a Bubble” Myth

I believe so. My understanding is that in ETF rebalancing equities that are part of the basket are treated like nothing but paper, mindlessly bought, mindlessly sold. Unlike a mutual fund, there is no one worried about the value of the ETF. And when lots of ETFs need to do the same thing with the same stock, it could be really good or really bad for the stock.

    The same mindless mechanism that gave them life will kill them off.

What I meant, is that the same mindless ETF inclusion that gave life to equities will remove it.





kleinbl00  ·  1660 days ago  ·  link  ·  

    My understanding is that in ETF rebalancing equities that are part of the basket are treated like nothing but paper, mindlessly bought, mindlessly sold.

They're matching a number. That number is unrelated to their profit. Where they profit is in, for example, buying 1000 shares of XYZ for $4.13 instead of $4.14. The 1000 shares are gonna be bought by the end of the day. If they can buy 2000 shares for $4.13 and sell 1000 of them for $4.15, they will have made $10 in keeping XYZ at 1000 shares.

    Unlike a mutual fund, there is no one worried about the value of the ETF.

The value of the ETF is not their responsibility. The ETF matching the terms of the prospectus is their responsibility. In order to do that, they exercise whatever trades, purchases and sales they set forth in the prospectus which, from our LACK example means repos, junk bonds, whatever. And again - if LACK is worth $4 on Thursday and $5 on Friday, they've got to come up with a way to grow their fund by 25% by Friday. However they want to. By whatever means necessary.

    And when lots of ETFs need to do the same thing with the same stock, it could be really good or really bad for the stock.

Precisely that. "I need to buy a thousand shares of GOOG because that's what balances the numbers and if the price is up 29%... uhhh..." "I need to sell a thousand shares of GOOG because that's what balances the numbers and if the price is down 50% we're selling because that's what the numbers want."

    What I meant, is that the same mindless ETF inclusion that gave life to equities will remove it.

The problem is that "remove" is likely an extremely gentle euphemism for certain possible scenarios.