Question on safety of ETFs

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Jeffreyalan
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Question on safety of ETFs

Post by Jeffreyalan » Tue May 08, 2018 7:37 pm

So I will confess that back in 2011 I succumbed to the siren call of the “doom porn” crowd. I read Schiff, Rickards and David Morgan. And slowly proceeded to lose several thousand dollars on silver and shorting treasury bonds ( since i was convinced of the $$ collapse any day).

Then i finally started to realize the joy of being agnostic towards future events and am ready to implement a slightly modified PP.

However, whenever I am about to put a good chunk of my life savings into ETFs (because of the simplicity), the fear monger in me comes out again. I start thinking about ETS lending out securities, flash crashes, poor liquidity in underlying assets, the amount of short selling in ETFs..yada yada yada.

Do most of you use ETFs? If so, what is your trust level? Not talking about exotic ones. Just bssic VTI or SHV or MINT.

Thanks in advance for responses!
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ochotona
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Re: Question on safety of ETFs

Post by ochotona » Tue May 08, 2018 8:47 pm

You could also directly buy the 30 stocks of the Dow and sidestep that worry.
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Desert
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Re: Question on safety of ETFs

Post by Desert » Tue May 08, 2018 9:48 pm

Jeffreyalan wrote:
Tue May 08, 2018 7:37 pm
So I will confess that back in 2011 I succumbed to the siren call of the “doom porn” crowd. I read Schiff, Rickards and David Morgan. And slowly proceeded to lose several thousand dollars on silver and shorting treasury bonds ( since i was convinced of the $$ collapse any day).

Then i finally started to realize the joy of being agnostic towards future events and am ready to implement a slightly modified PP.

However, whenever I am about to put a good chunk of my life savings into ETFs (because of the simplicity), the fear monger in me comes out again. I start thinking about ETS lending out securities, flash crashes, poor liquidity in underlying assets, the amount of short selling in ETFs..yada yada yada.

Do most of you use ETFs? If so, what is your trust level? Not talking about exotic ones. Just bssic VTI or SHV or MINT.

Thanks in advance for responses!
I think they're fine. I actually don't own any, but I wouldn't have a problem with them. I do slightly prefer the traditional mutual funds, but that's probably just because I'm old. :)
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ochotona
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Re: Question on safety of ETFs

Post by ochotona » Wed May 09, 2018 2:20 am

For buy and hold, I'd do mutual funds.
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Re: Question on safety of ETFs

Post by boglerdude » Wed May 09, 2018 2:40 am

Concerns me that the holdings of an ETF cant be sold to the market, ETFs have to rely on "Authorized participants"

I just bought a little FALN. We'll see what happens in the next panic I guess :/
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blue_ruin17
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Re: Question on safety of ETFs

Post by blue_ruin17 » Wed May 09, 2018 6:41 am

I think it is most essential that you ensure that your gold is not represented significantly through ETF holdings. As long as you have physical gold, you are automatically hedged against a systemic failure of the ETF system.

If some major ETF's suddenly became illiquid or started trading at a significant discount, I imagine that this could very likely trigger a panic in which investors stampede out of paper assets in general and into real assets. Gold has you covered here.

That being said, you would be more secure against systemic risk if you decided to hold your treasury bills and bond directly. Then, 75% of your portfolio is not directly exposed to ETF risk. And if you wanted to go one step further, you could even create your own stock index, although you would have to seriously consider the implications of tracking error, expenses, taxes, ect.

It is all a matter of trading convenience for risk. How much convenience are you willing to sacrifice for maximal security? For me, the optimal point is to hold my gold, bonds and bills directly, and accept the very small (but not unreal) risk of holding my stocks through an ETF.
"Like a confident pack, a confident portfolio provides both strength in fact, as well as — and this is the part I bet you’re missing right now and the focus of this note — strength in spirit."
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sophie
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Re: Question on safety of ETFs

Post by sophie » Wed May 09, 2018 7:30 am

The bread and butter stock ETFs like VTI are so widely used, that a failure of these ETFs likely couldn't happen unless there's a major financial sector collapse. In which case, your stock holdings will likely have crashed anyway.

Gold ETFs, on the other hand, are different beasts. They are a relatively recent phenomenon, many likely motivated by the big spike in gold prices in 2009-2012, and they're virtually untested in adverse conditions. Also, they are subject to many of the risks that the gold in the Permanent Portfolio is designed to protect against.

I don't hesitate to own stock funds & ETFs, but I only reluctantly hold gold ETFs. I use them for the gold I need to keep in tax-advantaged accounts, which are a large chunk of my PP. There is an option at Fidelity to store unallocated bullion in IRAs though....I keep putting this off but I do plan to switch from ETFs to bullion in my Roth IRA.

As far as cash ETFs go... SHV performed well through 2008 which is a nice stress test. Still, these also are relatively new, and cash is one thing you want to have as easily accessible and bombproof as possible. Probably a good idea to hold cash in several different places. Most of us use a combination of bank savings accounts/CDs, Treasury bills, and savings bonds in addition to ETFs.
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Re: Question on safety of ETFs

Post by Kbg » Wed May 09, 2018 9:05 am

ETFs are fine. However, there is no doubt that their pricing can get way out of whack with their intrinsic value during periods of market stress. This has happened repeatedly and widely. Remember though the underlying ETFs (not ETNs) hold the underlying asset and large market players (ETF owner/holders) can ask to have ETF shares created or redeemed in exchange for the underlying real assets. This creates an arbitrage opportunity which means the ETF price and underlying intrinsic price *will* reconvene in the not too distant future.

Really...they are no more dangerous than holding individual stocks. If you have safety concerns one suggestion is to stick with one of the large ETF issuers (Vanguard, Fidelity, iShares etc.).

At the end of the day there are very few financial assets that do not have some kind of financial intermediary. Unless you hold gold/cash in a safe in your house, there are financial intermediaries in this asset class as well. If a financial intermediary isn't holding an asset you are really exchanging one kind of risk for another (a fire burns up your cash or your gold safe is taken from your home for example.)

The big takeaway from what I wrote is that during market stress don't sell your ETFs...wait for things to calm down. Any good brokerage will allow you to check daily intrinsic value of an ETF via a symbol that looks something like ETF.IV with "ETF" being the ticker symbol of the ETF. It's not a bad idea to check IV before making any actual trade to verify the quoted price is close to the IV. Morningstar also provides some stats on ETF premium/discounts historically. With closed end funds (CEFs) p/ds can be very large...you will not see large p/ds in ETFs due to the aforementioned reason.
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Re: Question on safety of ETFs

Post by stuper1 » Wed May 09, 2018 12:03 pm

I was just listening to a Meb Faber podcast in which he mentioned that ETFs in general can have substantial taxation advantages over mutual funds. So, if you are talking about holdings in a taxable account, ETFs may be better than mutual funds.
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ochotona
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Re: Question on safety of ETFs

Post by ochotona » Wed May 09, 2018 1:14 pm

If you go with ETFs, you really have to learn and absorb the following ETF best practices. In particular, make Limit Orders your best friends.

https://www.vanguard.com/pdf/ISGETF.pdf

I agree 100% about Sophie's comments about gold ETFs - OK for trading, to hold some for rebalancing, not a robust store of value.
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Re: Question on safety of ETFs

Post by Tortoise » Wed May 09, 2018 6:19 pm

The approach I take is:
  • If reasonably convenient, hold the asset directly (physical gold, Treasury bonds and bills)
  • Try to apply "fund diversification" (hold more than one fund for each asset class, unless you hold it directly)
  • Try to apply "institutional diversification" (spread your assets, even the directly held ones, among more than one financial institution)
I figure that approach should help in the scenario where a single ETF, mutual fund, or institution fails.

That's more or less where I draw the line and get on with my life. For me, thinking about more exotic Armageddon scenarios is a fun exercise but not likely to be a very productive use of my time.
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sophie
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Re: Question on safety of ETFs

Post by sophie » Thu May 10, 2018 7:08 am

Kbg makes a great point about ETF values drifting away from those of the assets they are supposed to index. Before you buy or sell an ETF you might want to check the "premium/discount to nav" figure - obviously take care when buying at a premium or selling at a discount.

I haven't watched premium to nav much for stock ETFs, so maybe that does tend to be short term as Kbg stated. For gold ETFs, that can be much longer lasting...in fact there have been past threads proposing that you can make a bit extra on gold ETFs by owning different ETFs and switching between them to take advantage of differentials.
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