ETF crash

[nkp007]

And if so, would the liquidity air pocket be an opportunity to buy significantly discounted ETFs?

 

http://rick.bookstaber.com/2017/10/can-we-have-etf-meltdown.html

https://itunes.apple.com/us/podcast/38-black-monday-first-hand-accounts-of-the-87-crash/id1210383304?i=1000393758125&mt=2

https://itunes.apple.com/us/podcast/etfs-are-eating-the-financial-world-and-theyre-not-done-yet/id1056200096?i=1000393879885&mt=2

 

 

[Gamecock-YT]

might not be the cause, but probably will be a byproduct.

[rb]

It won't be the cause. But it will make it bigger, faster, high correlation, higher vol.

 

It will also be the opposite of what we've been seeing the past few years and it will create a wealth of buying opportunities for real investors.

[LC]

so an economic or market slowdown happens.

 

ETF holders sell their ETFs (lets assume a SP500 ETF). the price of the ETF goes down and this pushes market prices down further. which in turn forces more ETF holders to sell.

 

This is the general logic underlying the argument against ETF, right?

 

My question is...what are the flaws in this logic? For example, Okay so ETF holders sell...now they have some capital sitting around. What do they do with it? 

 

My other question...imagine there are no ETFs and everyone just owns those  shares. Would this  change anything?

[rb]

Yes there would be a difference if these people would hold shares. When you hold shares you know what you hold. So you may sell some KO or TSLA because in your heart you know they're overvalued but you keep your BRK cause you feel good about it. ETF holders have no idea what they're holding. In their mind they're "in the market" or whatever. Without fail everyone I've met can list a litany of ETF tickers but have zero idea what they actually hold.

 

When these people decide to "leave the market" because now it's too risky, or it's a bad time to "play the market" or whatever clever sounding phrase they use to sound smart it will lead to indiscriminate selling. People that hold actual shares while also prone to herd behavior tend to be more discriminate in their actions.

 

As to what they do with the capital they have sitting around? They will keep it in cash. You will hear recycled phrases of past crashes about how cash is kind and the best place to be in right now is in cash. That cash will be provided by my and my clients' accounts (most likely BRK's as well) while we feast on the great opportunities they provided us with to enlarge our wealth.

[Jurgis]

Yes there would be a difference if these people would hold shares. When you hold shares you know what you hold. So you may sell some KO or TSLA because in your heart you know they're overvalued but you keep your BRK cause you feel good about it.

 

There was never a time (let's talk about last 50 years or so) when a large percentage of people held shares knowing what they hold and behaved as you outlined.

 

People did not hold ETFs, so what, they held mutual funds or whatever their broker sold them.

 

ETF holders have no idea what they're holding. In their mind they're "in the market" or whatever. Without fail everyone I've met can list a litany of ETF tickers but have zero idea what they actually hold.

 

Not sure what "everyone" who you met is, but majority people were in the same boat before. Not with ETFs, with funds or whatever.

 

When these people decide to "leave the market" because now it's too risky, or it's a bad time to "play the market" or whatever clever sounding phrase they use to sound smart it will lead to indiscriminate selling.

 

The same as before.

 

People that hold actual shares while also prone to herd behavior tend to be more discriminate in their actions.

 

Do you have some research that confirms this or is this your anecdotal guess?

Do you have research on what percentage of holders "hold actual shares" and how that has changed over last 50 years?

 

As to what they do with the capital they have sitting around? They will keep it in cash. You will hear recycled phrases of past crashes about how cash is kind and the best place to be in right now is in cash. That cash will be provided by my and my clients' accounts (most likely BRK's as well) while we feast on the great opportunities they provided us with to enlarge our wealth.

 

Not different from past crashes.

[rb]

Most of what you say is true Jurgis. There is no real difference on paper between ETFs and mutual funds. Also the same story tends to play in crashes - so yeah not mu difference there either. The difference is that ETFs are largely automated whereas mutual funds were not. When a crash happens IAs tend to be busy not take your call, have a marital crisis, whatever. It slows the selling. With ETFs it will be faster.

 

Basically, like all cycles, the way down is the opposite of the way up. Up was slower and smoother - lower vol - down it will be faster and choppier - higher vol. It's also worth noting that in the history of the market basically every crash had a higher vol than the previous one. It's what happens when technology meets fear.

[Jurgis]

Maybe.

 

Though circuit breakers will kick in, the websites of brokers will crash...

 

I think you are right that any flash crash would be faster and more severe.

OTOH, a drawn out downturn probably would not differ much from previous ones.

 

Anyway, maybe.  8)

[jmp8822]

Most of what you say is true Jurgis. There is no real difference on paper between ETFs and mutual funds. Also the same story tends to play in crashes - so yeah not mu difference there either. The difference is that ETFs are largely automated whereas mutual funds were not. When a crash happens IAs tend to be busy not take your call, have a marital crisis, whatever. It slows the selling. With ETFs it will be faster.

 

Basically, like all cycles, the way down is the opposite of the way up. Up was slower and smoother - lower vol - down it will be faster and choppier - higher vol. It's also worth noting that in the history of the market basically every crash had a higher vol than the previous one. It's what happens when technology meets fear.

 

I tend to agree with what you're saying here. No research to back this up, but like you are saying, the technology of stock trading/ETF trading is much more advanced than 2007/2008 (much easier to trade for individual investors). 

 

In my opinion (having worked in the 401k business in the past), vastly more money is at the fingertips of investors directly via investment websites than the past.  Anecdotally, I think of the machine shop workers I used to talk with about their 401ks: some of these guys have several hundred thousand dollars in their 401ks and are nearing retirement - will they be able to resist the urge to reallocate (move to cash) their investments online, without having to ever talk to an adviser or even a customer service rep?

 

It seems like the old pension system being replaced by 401ks can really amplify wealth transfer because of how much money unsophisticated/fearful investors hold in a market crash environment - all to be sold with a couple clicks when fear is the highest.  It is sad that people can save and work for years to then lose half of it because of one or two behavioral investing mistakes.

 

Another speculation, will the concentration of wealth in baby boomers accounts have a major effect on the next market crash? Might there be a massive amount of selling because of boomers seeing their retirement income base/assets slipping away, wanting to stop the bleeding?