I'd like to read someone's debunking of this debunking.
I'm not sure I am convinced. I don't know enough.
I gotchoo boo. Gonna need to get into the weeds first, though. _______________________________________________________________________________________________________________ A few basix for the quiet kids in the back: - an equity is a stock and a stock is an equity. That's a tiny fraction of a company and only that company. You buy Google stock and you are buying a piece of Google, nothing more nothing less (for purposes of this discussion). - A mutual fund is a pool of money that owns stocks and bonds and shit but mostly stocks. Importantly, the price of a mutual fund changes once a day. At the end of the trading day, the value of everything in it is added up and that's what the fund is worth for that day. From an eTrade perspective they're very boring. They reflect what they say on their prospectus, which they put out every year. Mutual funds are basically someone's idea of how to make money and that someone can change their mind if they tell everyone who owns or wants to buy the fund. - An index fund is a kind of mutual fund that tracks some index (as in, a named and acknowledged list of stocks, like the S&P500 or the Russell 2000 or some other Magic Brand Name). The makeup of that index fund reflects the makeup of that index at the end of the day. Raise your hands if you see the problem. Anyone? Anyone? Bueller? So. Index funds, like mutual funds, have a price at the end of the day. Meanwhile whatever index they're tracking has had an instantaneous price all day long. Let's say I have KBIF, the kleinbl00 Index Fund. It tracks two stocks, each worth the same amount of money, and KBIF holds 50% of each. At the end of a particular trading day, KLEIN is up five percent. BL00 is down five percent. My fund is now imbalanced. The value of KLEIN in my fund is at 52.5% instead of 50% and the value of BL00 is at 47.5% instead of 50%. So in order to balance at the end of the day, I have to sell enough shares of KLEIN and buy enough shares of BL00 to get them both back to 50%. This is where the fund managers make their money, and why they exist. Yeah, lower fees. Yeah, no active management. But there's some guys there who are allowed to trade all day long and their job is to get back to equal by the end of the day so they leverage the time scale they're working at vs. the time scale you're working at to make their money. It's like how UPS used to hold onto your COD for a week, not for security, but so they could pump it into an interest-bearing account and make an extra three cents off your $400. An aside: "day-trading" does not legally mean "I spend my days playing eTrade." Day trading is a defined and protected IRS activity that exists for purposes of simplifying investment taxes: in order to legally be a day trader you have to start the day at zero equities, finish the day at zero equities, and do whatever buying and selling you want such that you hold no stocks overnight. Hold 'em overnight and you're a "short term investor" and that puts you on another tax schedule. So. Day trading means "I give no fucks what the long-term health of this equity is, I care not a whit about its management, I don't even give a rat's ass what this company does, I'm just betting the stock will go up four cents in the next hour so I'm going to borrow money to own 400,000 shares between 1pm and 3pm so that a shift from $12.37 to $12.39 will make me eight grand without requiring me to have five million dollars in the bank to play with." _____________________________________________________________________________________________________________ Awright. So ETFs. An "exchange traded fund" is a mutual fund or an index fund that has an instantaneous value. It doesn't shift at the end of the day, it's live and hot. What's in it rebalances every night, and the companies that make up that ETF have to buy and sell to rebalance every night and make their money the exact same way. You, the retail investor, the eTrade ninja, are buying and selling the ETF. The smart money trades "creation units" back and forth at extremely high speed, leveraging tiny fractions of trade. It's noteworthy that ETFs have exploded since 2001, which is when the SEC made stock markets count value in pennies rather than fractions - when your smallest unit is a sixteenth of a buck you have six and a quarter times as much movement for every blip of the needle than you do when it's a hundredth of a buck. BUT WAIT THERE'S MORE You buy an ETF because you want to buy a sector, not a company. You don't know which pharmaceutical manufacturer is the bestest and you don't care to learn - after all, there are 587 publicly traded biotech stocks on the US markets. So you buy a pharma ETF. You like Vanguard because of course you do. So you buy VHT like everyone else. VHT has 390 stocks in it. Remember - the biotech industry only has 587. This isn't perfect overlap, but holy shit. VHT also has a market cap of $9b. The biotech industry has a market cap of $700b. So okay, shit. That one Vanguard fund is trading more than 1% of the biotech industry every time it trades. And it's not trading just the good stuff, it's trading the bad stuff and nobody is paying any attention to the individual stuff anymore. More than that, 43% of VHT's holdings are in ten stocks (the other 57% is the other 380 stocks). Which means the little stocks are no longer influenced by what they are or how they're doing, they're influenced by the big stocks. Full stop. My daughter owns some AIMT. This is the company that makes the peanut powder she takes that has effectively neutralized her epipen-grade peanut allergy. And about eighteen months ago they published the results of their trial indicating that they'd effectively neutralized peanut allergy for a big percentage of kids, whereas their two competitors had skunked out and given up. But the stock went down fifteen percent. Johnson & Johnson, you see, had missed on earnings by a couple pennies so the markets punished the shit out of the stock. I think J&J was down 4% or some shit. J&J is in 287 index funds. AIMT is in 40. JNJ's market cap is $340b. AIMT's is $1.3b. So if you've got creation units that hold JNJ, to correct the 5% that JNJ goes down you're going to have to sell assloads of all the little shit in the basket. At the end of the day, an ETF is a derivative - you aren't trading on fundamentals, you're trading on a strategy derived from those fundamentals. You are, mathematically, a degree removed from what is actually making money. We're at a place where any "tech" fund you own is not moving up and down based on nVIDIA or Seagate, it's moving up and down entirely on Microsoft, Amazon, Alphabet, Facebook and Netflix. The individual performance of the little companies that are innovating or languishing is no longer important. THIS is what Burry is talking about when he calls indexing a bubble - nobody is indexing because they see it as a money saving option that exposes them to sector performance without needing to do the necessary research. People are indexing because the necessary research is actively detrimental to your profit potential. People are indexing because the liquidity in the indices swamps the liquidity in the underlying equities. There are 287 ETFs that hold JNJ. There are 136 for whom JNJ is one of their top 15 holdings. And the companies that are making money off of ETFs are making it by leveraging their timeframe (nanoseconds) over yours (however long it takes you to log into eTrade in a panic and dump VHT because you had too many beers at lunch and your friends spooked you). Remember - you're not dumping VHT because of anything that's happening at J&J, or Fisher, or Medtronic, or Merck. You're dumping it because Trump tweeted nasty shit about healthcare. There is no fundamental connection between your action and the underlying value of the equities you're mucking with. And that means that as soon as someone successfully screams "the emperor has no clothes" it all comes crashing down. ______________________________________________________________________________________________________ You'll note that this was an oblique discussion of ETFs, not a "debunking" of Ben Carlson's article. This is because Ben Carlson's article reveals zero insight into the underlying mechanism of passive investing, zero insight into the mechanical problems of derivatives trading and zero insight into the criticisms raised by the Michael Burry article he's responding to. To whit, one of Burry's objections: Carlson's response: Plus, index funds never lever up your holdings. They never receive a margin call. They don’t put 30% of your holdings in Valeant Pharmaceuticals. And no index fund has ever closed up shop to spend more time with their family. There will always be investors that panic, regardless of the type of fund they’re invested in. Why would index funds or ETFs be any different than any other fund type or security in that respect? You'll notice that he misses the fundamental problem: a holder of creation units HAS TO BUY OR SELL. They can pick when, they can pick where, but they better pick by 4:30PM or they're in violation of the SEC. And remember - they're not making money on what's in the index - they're making money on making the index look the way they said it would look. If that fund goes from $100 to $30 they don't lose $70, they make or lose whatever money it costs them a nanosecond at a time to keep the balance the same. If they have to sell JNJ into a goddamn vacuum to get the numbers right, there is zero incentive for them not to. After all, they don't hold the index they just move the legos around. Ben Carlson doesn't even get this. He can't even see the criticism. He is so blind to the fundamental nature of index funds that he can't even understand why they might worry certain people. He'd rather talk about something else: Index funds also weren’t around for the South Sea bubble in the 1700s. No. In all five cases, those crashes were caused by a shift in the perception of value. People thought things were valuable, then they decided they weren't, and everyone dumped as fast as they could in an attempt to not be standing when the music stopped. That is because what they were trading had a value well out of line with its fundamentals. There are 215 ETFs that hold Netflix. There are fifteen that have NFLX in their top 15 holdings. Netflix, meanwhile, is spending $15b for content every year that, by the way, largely belongs to other companies: They lose about $3b a year doing this. They are covering this by issuing junk bonds at fucking 6%. And if people suddenly realize that Netflix is now has been and shall always be a shitty online version of mid '90s USA Network, not only are $127b in assets in jeopardy but also 215 ETFs. Friend of mine is a screenwriter. He told me a story once about "taking down the S&P500" by having a movie he wrote (Treasure Planet) do poorly enough that Disney had to restate its earnings, which prompted a 3% retraction in the markets that day. Now - there were a lot of steps between "bad script" and "market tanking" but ultimately, his execution of a task that had nothing to do with finance destroyed several billion dollars worth of market cap. We now live in a world where a Ronan Farrow article about Kevin Spacey negatively impacts every ETF on this page.I'd like to read someone's debunking of this debunking.
“Potentially making it worse will be the impossibility of unwinding the derivatives and naked buy/sell strategies used to help so many of these funds pseudo-match flows and prices each and every day. This fundamental concept is the same one that resulted in the market meltdowns in 2008. However, I just don’t know what the timeline will be. Like most bubbles, the longer it goes on, the worse the crash will be.”
When an index fund investor sells, they’re technically selling their holdings in direct proportion to their weighting in the index. So there is little market impact involved. Again, index fund investors are simply owning stocks in the proportion that all active investors own stocks.
Do you know what didn’t cause the Great Depression or Japan stock market crash or 1987 crash or 1973-74 bear market? Index funds.
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It seems to me like you're saying that these problems are mostly with ETFs that track certain indexes, as opposed to traditional mutual funds tracking the same indexes. If I agree that this whole thing is a problem, is the solution to just stick with mutual funds?
You roll with a mutual fund because it's got active management. The people behind it can do what they want to make you money within the terms and limits of the fund's prospectus. There's usually some mealy language in there that says "if shit gets dicey we're gonna get weird with it" but by and large, they're following directions, not legally bound to create a synthetic security for you come hell or high water. People got mad at mutual funds because (A) you have to pay someone to run them and when you're barely making 4% giving up 1% to management sucks (B) you can't day-trade 'em because the price is the price at night and that's it (C) the Bogleheads went hard into the idea that nobody has any alpha over the long run so grab all the beta you can get and shut the fuck up. These are all legitimate complaints. But the note under the note is that it's harder to make money in equities when central banks are giving money away and everybody takes on cheap fuckin' debt and buys their shares back and now your stocks are all priced as if money was free. Apple now has $210b in cash on hand. They just issued $7b in bonds. Today’s debt sale could help Apple refinance roughly $2 billion of debt that’s scheduled to mature this year, in addition to much of the $10 billion it has coming due in 2020, according to data compiled by Bloomberg. They also spent $144b on stock buybacks in the past 18 months. "How the fuck are you supposed to make money?" everyone asks. The happy answer is "ETFS!" because then you're somehow above all this shit, buying sectors. The reason this discussion is 16 posts long is that there aren't many people who actually know what ETFs are or what you're buying when you buy them - including bloggers and journalists. The real estate guys knew what a tranche was, knew what a CDO was. Nobody else did. So nobody but the real estate guys knew shit was gonna rip the minute there was a tear. What you're watching is the real-time discovery of what exactly an ETF is by people who have never wanted to know before.With the 30-year Treasury at record lows, many companies have been able to borrow more cheaply for much longer. Apple will pay around 2.99% interest on its new 30-year bonds, compared with the 3.45% it’s paying on three-decade bonds it sold in 2015. On a $1.5 billion issue, that equates to savings of nearly $7 million of interest annually, or more than $200 million over the course of three decades.
...no. A piece at a time, from Burry: Nobody is losing money where they should be because there's been so much free government cash flooding the markets. And ETFs have made it so that the price of an equity has nothing to do with the value of an equity. The things people are buying hide the underlying aspects of the stuff that makes up the things people are buying. CDOs were make-believe products driven by make-believe models with very real money pumping into them and as soon as the model and the reality diverged, I was destined for a Michael Lewis book. That which ACTUALLY makes up an ETF has fuckall to do with what the funds PROFESS to make up an ETF. The amount of money indexing is not at all related to the amount of money represented in the stocks that make up the index which means a tiny move in the real stock market becomes a huge move in the index funds. The guys who are selling these things are collecting nickels in front of steamrollers because THEY aren't the ones doing the running. YOU are the one who is going to get run over. The problem in 2008 wasn't mortgages defaulting, it was the annihilation of the derivatives whose value was determined by those mortgages. The problem with ETFs won't be any hypothetical drop in the underlying value of the equities that make up the ETFs - the problem will be the mechanism by which those losses are translated into the ETFs because there's leverage and transformation between the values of the two. Now, here's Ben Carlson: Herp derp I don't understand Burry well enough to object to what he's saying here's a bunch of random platitudes I mean, Carlson is basically writing a rebuttal of the argument that index funds are bad because nobody is managing your money. Nowhere was that argument made by Burry. Burry's argument was that the mechanisms by which ETFs are constructed are perverse and weird and subject to different forces than the supply and demand of the underlying equities and Carlson legit didn't understand that.Central banks and Basel III have more or less removed price discovery from the credit markets, meaning risk does not have an accurate pricing mechanism in interest rates anymore.
And now passive investing has removed price discovery from the equity markets.
The simple theses and the models that get people into sectors, factors, indexes, or ETFs and mutual funds mimicking those strategies -- these do not require the security-level analysis that is required for true price discovery.
“This is very much like the bubble in synthetic asset-backed CDOs before the Great Financial Crisis in that price-setting in that market was not done by fundamental security-level analysis, but by massive capital flows based on Nobel-approved models of risk that proved to be untrue.”
“The dirty secret of passive index funds -- whether open-end, closed-end, or ETF -- is the distribution of daily dollar value traded among the securities within the indexes they mimic.
“In the Russell 2000 Index, for instance, the vast majority of stocks are lower volume, lower value-traded stocks. Today I counted 1,049 stocks that traded less than $5 million in value during the day. That is over half, and almost half of those -- 456 stocks -- traded less than $1 million during the day. Yet through indexation and passive investing, hundreds of billions are linked to stocks like this. The S&P 500 is no different -- the index contains the world’s largest stocks, but still, 266 stocks -- over half -- traded under $150 million today.
“This structured asset play is the same story again and again -- so easy to sell, such a self-fulfilling prophecy as the technical machinery kicks in. All those money managers market lower fees for indexed, passive products, but they are not fools -- they make up for it in scale.”
“Potentially making it worse will be the impossibility of unwinding the derivatives and naked buy/sell strategies used to help so many of these funds pseudo-match flows and prices each and every day. This fundamental concept is the same one that resulted in the market meltdowns in 2008.
Ah, got it. I've been keeping an ear to the liquidity thing, but this situation makes some more sense to me. So there's a bunch of shitty low liquidity stocks making up ETFs that are going to get vaporized once the market moves in such a manner that the index funds require re-balancing and no one is looking to buy them. The same mindless mechanism that gave them life will kill them off.The problem in 2008 wasn't mortgages defaulting, it was the annihilation of the derivatives whose value was determined by those mortgages. The problem with ETFs won't be any hypothetical drop in the underlying value of the equities that make up the ETFs - the problem will be the mechanism by which those losses are translated into the ETFs because there's leverage and transformation between the values of the two.
Humor me a minute because your confusion is typical of everyone who looks at this and it's important to try and dispel it because it fucking matters. Did you... get anything from that? No? Congratulations. You weren't supposed to. That's a screenwriter's trick. It's called "The Pope in the Pool." The phrase was coined by Blake Snyder, a nice guy who was a terrible screenwriter who took the limited success from Stop Or My Mom Will Shoot to launch a career as a screenwriting guru. "The Pope in the Pool" comes from a scene in the unmade script The Plot to Kill the Pope wherein a bunch of necessary (but boring) exposition is delivered by someone yammering while the screen is filled with the pope, wandering through a swimming pool in a bathing suit. The idea is that by giving the audience a distracting image, you can bathe them in bullshit that's boring that you, as the storyteller, don't want them to know but you, as the storyteller, need them to know or else nothing will make sense. It's worth noting that Blake Snyder's magnum opus is a book called Save the Cat! - on the example that the first thing you should do is have your protagonist do something endearing like... save a cat. That makes them likeable, you see. It's such base-level bullshit that you get writers' in-jokes like this: Yeah. First scene in House of Cards is Frank Underwood killing a dog. The anti-Save the Cat!. How droll. It's worth noting that Save the Cat! is third-gen screenwriting advice. The content in it is basically a paint-by-numbers dumbing-down of William Goldman's Adventures in the Screen Trade. By way of comparison, Goldman had an Oscar when he wrote it. The "save the cat" advice in Adventures in the Screen Trade is not to have your hero save an animal, it's to not let your hero act in a callous and insensitive way even when it's totally motivated by reality and plot. The example used is Goldman's own Great Waldo Pepper: SPOILERS: she plummets to her death and Robert Redford doesn't save her. It's worth noting that Adventures in the Screen Trade is famous for the tagline "nobody knows anything" because it was, in no small part, a rebuttal of the first-generation screenwriting book Screenplay which is basically a narrative version of Cole & Haag which was basically a formula for how to do whatever the fuck you want so long as the page count and formatting is right. So. From "here's what a screenplay should look like" to "Here's Margot Robbie instead of understanding", institutionalized. This matters because we learn not from statistics or math but from narratives. There's a plot device in screenwriting called the MacGuffin. What's a MacGuffin? Nobody cares. Somebody wants it, someone else has it, what it actually does doesn't matter. And within The Big Short, the actual mechanism by which the economy crashed is a MacGuffin. It's a thing that doesn't fucking matter. Michael Lewis is a great writer. But what he writes is HOW, not WHY. And as The Big Short has basically become the narrative of the 2008 financial crisis, all we care about is how it came about, not why it came about. This is unfortunate in that there were other narratives. The Big Short's principle narrative was that some people were smart, more people were dumb, and the smart people got rich while the dumb people lost everything. Prior to it, however, the narrative was about quants and exotic financial instruments and the preposterous complicated risks that were layered and interwoven in order to sell to others. Here's Brad Pitt in The Big Short: In the movie he basically plays this same character from True Romance: In real life, however, the person he's playing was more like this Brad Pitt: What REALLY happened with CDOs is that everyone selling them knew they were bullshit but nobody buying them was sophisticated enough to know it. Michael Burry (and others) were the ones who had the money to bet against an entire segment (Burry famously paying Goldman Sachs to create a special instrument just for him that would allow him to bet against the market - it's better to say that Michael Burry won a wager than that he invested. Because fundamentally, the narrative on CDOs was that they were investments that produced outsized yields through acceptable risk. The reality of CDOs was they were a way to make money by buying risky loans, with the riskiest loans paying the most money. If that's a junk bond, everyone understands it - filter it through enough statistical and mathematical laundering and it's a black box. Prior to The Big Short, the financial crash was about clever banks that managed to hide nasty bullshit in stuff they sold as if it were roses and they should all go to jail. After The Big Short, the financial crash was all about clever venture capitalists who saw a risk nobody else foresaw. Narratives matter. And the narrative on ETFs is that they allow you to buy a market segment without experiencing any risk. The reality of ETFs is they're a derivative that nobody's looking at and the way they trade is not the way anything else trades. The incentives in the construction of an ETF are wholly removed from the incentives of buying an ETF. The incentives in the management of an ETF are wholly removed from the incentives of owning an ETF. And this is why there are eleventy-seven arguments against Burry - because everyone is parroting the narrative they've all learned about ETFS, which is they're great because they aren't actively managed and there's no risk after all you're just buying a basket of stocks. But you're not. You're buying a magic number that you're giving an arbatrageur the opportunity to scalp in exchange for meeting an arbitrary goal. The goal of a mutual fund is to MAKE MONEY. If you buy a mutual fund, you are 100% aligned with the fund managers. The goal of an ETF is to HIT AN ARBITRARY NUMBER AT ANY COST. If you buy an ETF, your goals and the ETF creation units holders' goals have no correlation whatsoever. My favorite platitude of investing is "bear markets return capital to its rightful owners." The people paying attention to what's going on, as opposed to what they're being told have an advantage. CDOs were considered low risk because a national decline in housing prices was calculated to be a "six sigma event." In other words, according to the math used in their creation, the sun was more likely to go nova than for there to be a national decline in housing prices. Of course, when you create a powerful incentive to generate risky mortgages you fundamentally alter the makeup of the housing market. This is the sort of externality that none of the CDO originators included in their model because if they had, they couldn't have sold them. And yeah - if there were a few million dollars worth of CDOs they would have been a cautionary tale. But there were two trillion dollars' worth. And there are three trillion dollars worth of ETFs. It's worth noting that Michael Burry was diagnosed with Aspberger's shortly after he made all his money. It made sense to him - he'd never liked people, he'd never understood them, and he had a challenge communicating with everyone. This probably gives him an advantage in cutting through bullshit narratives - the collective wisdom is much less available to him simply because he doesn't plug into the zeitgeist the same way. The zeitgeist is that ETFs and stocks are interchangeable (with ETFs being objectively better). The reality is that ETFs are pretending to be stocks and as soon as the situation is stressed, there's no reason to believe they'll behave like stocks. In fact, there's every reason to believe they'll behave like CDOs. They'll behave like short squeezes. They'll behave like a bunch of disparate equities that have no reason to be interlinked that are tragically interlinked nonetheless. And that could get interesting. Did I explain that adequately?
Cornwall seeks highly asymmetric investments, in which the upside potential significantly exceeds the downside risk, across a broad spectrum of strategies ranging from trades that seek to benefit from market inefficiencies to thematic fundamental trades. The firm has produced an average annual compounded net return of 40 percent (52 percent gross). Cornwall Capital was one of a few investors who saw and shorted the subprime mortgage crisis market prior to the 2007 collapse; according to Michael Lewis, they were perhaps one out of 20 in the world who did so.[5][9] This particular trade generated 80 times the initial premium (investment).[1] The founders of Cornwall Capital started a hedge fund in their garage with $110,000 and built it into $120 million when the market crashed.
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. What I meant, is that the same mindless ETF inclusion that gave life to equities will remove it.The same mindless mechanism that gave them life will kill them off.
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. 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. 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." The problem is that "remove" is likely an extremely gentle euphemism for certain possible scenarios.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.
What I meant, is that the same mindless ETF inclusion that gave life to equities will remove it.
As the article said : I have ETF shorting the index, Shorting with a x5 leveraged, I have ETF on gold, oil, bonds, whatever I can think of, all less correlated to equity than any active fund. Probably those ETF trade for far less volume than S&P's ETF but I dont get how The 1st dude (the 2008 short guy) can pretend their is a systematic risk with ETF when he only address the (legitimate) risk of If he only mean we have an irrational equity bull market because of ETF (which are mostly S&P related, volume wise), then he got a point. But it's not "passive is a bublle" it must say "passive is creating the bubble'"and active or passive, you'd better stay away of that artificial bull market"self-reinforcing feedback loop"
of equity's ETF and ignore the ton of others ETF which counter the feedback.
Here's the important bit from Michael Burry: There's liquidity you want and there's liquidity you need. If you would like to sell a million shares of Alphabet, there's probably a buyer for a million shares of Alphabet. However, if you need to sell a thousand shares of Alphabet because you need to rebalance your ETF at the end of the day, you can't really wait. And you take whatever price you can get. In a market where 99 big fuckin' ETFs are doing the same thing you are and another 100 or so that still gotta dump. Of the 1700 ETFs in the United States, 200 of them hold GOOG. So in a big market move, GOOG is going to move. And considering the CU holders have minimal financial incentive to get the best price, they're going to dump it when they need to dump it. Not everybody needs to sell to shitcan the price. If a million people hang onto their shares and a thousand people let it go for 50 cents on the dollar, the market cap held by that million people goes down just the same. And if GOOG goes down, every fund that holds GOOG has to sell everything else in their fund to rebalance. So. Bad day for Google, ten percent of the ETFs on the market are selling. THAT is what Burry means by "the impossibility of unwinding the derivatives" and "naked buy/sell strategies... to match flows and prices." It's like a short squeeze - you need to cover the short. And if there's no stock to cover the short, you pay whatever you need to cover the short.I dont get how The 1st dude (the 2008 short guy) can pretend their is a systematic risk
“Potentially making it worse will be the impossibility of unwinding the derivatives and naked buy/sell strategies used to help so many of these funds pseudo-match flows and prices each and every day.
So he is saying ETFs (still ignoring non long-equity-ETF, but I get it volume-wise) should increase volatility. That is an easy proposition to test: did high caps stock (GOOG and co) volatility statistically increased (compared to low cap) since the raise of ETF?. Or their Drop-down (higher to lower price difference) range statistically increased (if we believe the ETF-effect only happen in a panicky market) My bet is on No: volatility ( even the bear marked volatility) didn't change for those stocks (If the 2008-short-dude believe that, he did the math. And If I had way more than my puny 10k invested in stocks, and still remembered how to do a proper F-test, I'll check GOOG vol/ Market Vol , for 5 years before 2008, then GOOG Vol /Market Vol, the 5 years before 2019, and if I found a statistically meaningful increase, I'll start worrying)
He's not saying ETFs increase volatility. He's saying ETFs are derivatives, and that trading in a derivative is different than trading in an equity. Look at the mechanics of it - Let's pick something heinous like a Direxion (they're always Direxion) 3x bear ETF. How 'bout LACK? LACK's goal is These leveraged ETFs seek a return that is 300% or -300% the return of its benchmark index for a single day. The funds should not be expected to provide three times or negative three times the return of the benchmark’s cumulative return for periods greater than a day. Okay, so how exactly do they do that? So. To you, it's a 3x bear ETF. You buy it from eTrade. But Direxion is buying and selling a witches' brew of CDOs, swaps, repos, junk bonds and other bits of financial plutionium that have exactly fuckall to do with equities. Which is why nobody will let you play leveraged ETFs in your retirement fund but I mean FFS y'all. And yeah - it's a shitty little million dollar ETF. But that's the point - when you're buying an ETF you aren't buying stocks. You're buying something that's related to stocks, be it closely or loosely. There's $3T worth of ETFs out there right now. There were $2T worth of CDOs in 2008.to seek daily investment results, before fees and expenses, of 300%, or 300% of the inverse (or opposite), of the performance of the Consumer Staples Select Sector Index. There is no guarantee the funds will meet their stated investment objective.
The fund, under normal circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the Index equal to at least 80% of the Fund’s net assets (plus borrowing for investment purposes). On a day-to-day basis, the Fund is expected to hold money market funds, deposit accounts with institutions with high quality credit ratings, and/or short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including US government securities and repurchase agreements.
Not all ETFs are ridden with toxic assets. A lot of them are "a bunch of equities." But the thing you're buying and the thing you think you're buying aren't the same. Even at the purest level, when you buy an ETF you're buying it because you think it will go up, the same reason you'd buy a mutual fund. But with a mutual fund, the fund managers are also thinking it will go up and are doing their level best to make sure that it does - they may not be right, they may not be good, but they're looking at everything they own and picking the good stuff and eschewing the bad stuff. A clean energy mutual fund would probably buy First Solar but would not have held Sun Edison. It may or may not have been exposed to SolarCity. But a clean energy ETF is going to own First Solar, Sun Edison and Solar City because it's buying the sector. And there's no incentive for the creation units holder to buy FSLR over SUNE because his whole job is to HFT the underlying securities to make pennies at a time so that at the end of the day, he holds 10% SUNE, 10% FSLR and 10% SCTY. He doesn't give a fuck when SUNE goes tits up other than that he's gotta sell FSLR and SCTY along with it. With a mutual fund you're buying the active management of the components in the fund. With an ETF you're buying the convenience of not thinking about it by actually not thinking about it. You're buying winners and losers. And sure - over the long run, we're all winners. There is no beta unless equities are fundamentally a worthwhile investment. Burton Malkiel popularized the notion that if you miss the 10 best days in the stock market over the past 90 years you'd have given up on something like 13000% returns... but nobody talks about how missing the 10 worst days in the past 90 years would have saved you something like 90,000% losses. But if you ain't at "Always Be Investing" they don't get to make the pennies forming artificial funds for you. How to benefit from it? Yeah. Million dollar question. This is one of the reasons I follow aiwierdness.com so avidly. 85% of the trades out there right now are algorithmic... and those bots do fine so long as they stick to their lane. I am not confident that there's enough agile AI out there to deal with a downturn in a logical manner. And I am not confident that there's enough money out there that's independent of buy/sell agreements necessary to build up a $3T ETF industry without invoking a lot of chaos on organic investment.
Ok it says equity ETF are bad because the long equity bias might come crashing down ! Which make little sense to worry about . If the market crash down, every active fund are fucked too. May be their beta is a little less correlated to the market than ETF, but we're talking peanuts
Fundamental value theory states that a stock is worth the future value times the odds of it going up divided by the odds of it going down minus the value of the starting investment in a risk-free vehicle. Castle in the air theory holds that a stock is worth what you can sell it for. Fundamental value theory has been out of vogue for twenty years. WeWork is worth $47b because you'll be able to sell it for $80b in another couple years (right? right!). ETFs are the way to go because everybody knows that ETFs are what you want to buy. Until ETFs are what you want to sell and suddenly, ETFs aren't worth as much.