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  1. #1
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    ETF effects on market

    I hear a lot of talk about how etfs affect the market. If an etf trades as a stock then I would think that it would be rare that they sell the underlying securities in their basket because they do not need to redeem or issue new shares like a mutual fund. Is the effect mostly that etfs tie up a lot of shares and therefore reduce the supply in the overall market? I hear market pundits say to buy more in the afternoon than in the morning due to redemptions but wouldn’t that only apply to mutual funds?

    i know there are other concerns about liquidity but I try to buy etfs with higher trading volume and with bigger ownership.

  2. Stocks/Investments Moderator boneil's Avatar
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    #2
    I don't fully understand the effects of an ETF on the markets. If everyone is buying ETFs, does that buoy the underlying stocks? Or are we simply buying a pretend share, and there is no affect on price of the ETF or underlying regardless if we are buying or selling. Lets say, a recession hits and everyone sells their 401Ks, and liquidate their holdings. If everyone sells their ETFs, will that cause the price of the underlying stocks to go down? I don't think so. Or, if the price of the underlying stocks go down and trend lower for an extended period of time, even though there are no sellers of the ETF and just buyers, the price of the ETF would still decline.

    Does our money that we have in retirement accounts owning ETFs, actually affect anything. Does owning an ETF, reduce the supply of the market? I'm not sure. And I lean towards that it doesn't.
    And buy at any time of the day, it doesn't matter.
    Thanos was the hero

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    #3
    I think it is mutual funds and hedge funds that really have the biggest effect. They have to sell the underlying securities when there are redemptions. The ETFs do lock up shares but they don’t usually have redemptions. They may affect the share supply I guess. I’d like for Cramer to explain this since he mentions that ETFs are affecting the market.

  4. Stocks/Investments Moderator boneil's Avatar
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    #4
    I have come across a couple discussions about ETFs recently. Yes, the shares are being tied up, reducing the number of shares available to trade, which reduces liquidity which causes larger moves. ETF's may be amplifying the affects of the Feds QT. And things will only getting worse as the Fed tightens and we keep buying up ETFs. I think QT is suppose to run for a couple years or until the next recession.
    Thanos was the hero

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    #5
    I may not understand EFT’s, so this is more of a question than a statement. Aren’t EFT’s passively traded, meaning more by algorithms than humans? If this would be true and these computers are making trades in nanoseconds, could this really add to the volatility that we are experiencing?

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    #6
    Quote Originally Posted by Bassin08 View Post
    I may not understand EFT’s, so this is more of a question than a statement. Aren’t EFT’s passively traded, meaning more by algorithms than humans? If this would be true and these computers are making trades in nanoseconds, could this really add to the volatility that we are experiencing?
    ETF's, unlike mutual funds, can be shorted or traded like stocks so they can sell at a premium or discount to the actual value (NAV) of the securities or bonds that they hold. Since they trade like an individual stock then I guess they could be bought and sold by computers. However, even though a mutual fund is not bought or sold like an ETF, the securities they hold can be bought and sold by computers etc. so it would end up having an effect on the Net Asset Value of the mutual fund even though the shares of mutual funds aren't traded like an ETF.

    A lot of ETF';s mirror mutual funds. Lets say I want to make an ETF that mirrors the S&P 500. I buy the same stocks that comprise the S&P 500 that a mutual fund holds and lets the value is $100.00 (NAV). Then I issue 100 shares for $1.00 that are bought by people. If these people want to buy or sell them then they trade them in the secondary market like a stock. Now lets say I start a mutual fund. I get $100.00 from people that want a share of the fund. I issue 100 shares at $1.00. If someone wants to redeem their share then I sell the securities I hold at the current value (which will be the same as the Net Asset Value) and I take the money from the sale and pay it to the mutual fund holder.

    Thats my feeble attempt at explaining it.
    Last edited by NitroZ7; 12-21-2018 at 06:27 PM.