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.