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Wild card risk in ETFs

Posted by John Reed on

I keep hearing that ETFs are cheap and a great new way to invest. I am leery because I suspect they may not behave the way you need during a major financial crisis.

Here is a paragraph from a 3/11/17 Wall Street Journal article about the SEC rejecting an application from the Winkelvoss Bitcoin Trust.

“The decision comes as SEC officials have voiced concern about the complexity of some exchange-traded products and how volatile they can be during market routs. Trading in hundreds of exchange-traded products was halted on August 24, 2015, wen the market value of their shares diverged widely from the underlying holdings.”

Uh, if the market value of ETF shares diverge widely from the referenced security, what good are they?

Wikipedia list four risks of ETFs: tracking risk (see above), leverage within some ETFs means decline of their underlying assets might trigger financial difficulties that might in turn lower the price of the underlying assets compared to if the ETF in question had not existed, regulatory risk stemming from agencies who are not now regulating ETFs asserting jurisdiction over them, and counterparty risk. The latter refers to your placing a bet, winning, and not getting paid off.

Cheaper fees and and fewer capital gains have a hidden cost and hidden risks.

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