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.