I’ve slowly been working through understanding the extended risk of owning a large concentration in index ETF’s and index funds. The narrative goes “you can’t beat the market!!” It turns out ETF’s are not the market. They are derivatives and they are fairly opaque to market risk. The problem is entry, exit, price discovery and congestion. The problem is also the narrative that pretends these are nearly risk free assets ad certainly more risk free than single stocks.
ETF’s tie up your money. The money disappears month after month, year after year after being shoved in the maw automatically with no clear understanding of what is owned, the value of what is owned or the end game on how to get the dough back from the maw. No clear understanding of the financial manipulation and magic associated with these assets. In normal times, no big deal. You don’t know the value but you can write an order to sell and the ETF’s sell because they are liquid enough and your profit is basically determined by a state function . Come the crunch they will not be liquid, and a sale will be forced by illiquidity and robot sales to way below market value.
I saw some recent self proclaimed FIRE blogger “expert” talking about how index funds are safe because they represent such a small portion of the market. I guess he thinks 70% is small. These funds have never represented this level of market weight and nobody knows how they will respond to a crash, but my guess is the volatility will be increased as a power law not in some linear way. A power law for the integer “2” is 1, 2, 4, 16, 64 etc. If volatility is increasing by 2, 4, 16, and not 1, 2, 3, the carnage will be intense… beyond intense.
Included are a series of 3 videos for about 2 hours worth of how to think about your risk
It’s a 2 hour counterpoint to the mantra, when the boggleheads start spreading the BS.
I do not know what is going to happen. The VIX ETF is running 12 as of today. In Nov 2008 it was 62, a multiple of 5 compared to 12, which was the VIX in Apr 2007. ETF’s and index accounted for around 25% of the market in those days, meaning 75% of the market was amenable to price discovery. Today it’s reversed. I think it might be a Pareto principle situation. 80% of the BS is promulgated by 20% of the morons when it comes to risk. And people think Suzie O doesn’t know what she’s talking about.