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Old 08-30-2015, 10:46 PM   #81
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It bothers me very much that some of the larger, more liquid ETFs were showing price declines of 40% while their underlying stocks were down only 10%.

If an ETF grossly deviates from the underlying basket of stocks, something is wrong with how they work. Clearly there are issues in volatile markets. Some people were apparently able to buy at those extreme discounts and keep the trade, while other people may have foolishly sold through stop losses or whatever.

You can buy CEFs if you want that extreme discount/premium "feature".
I think this shows the ETF's may not be as liquid as believed. The retirement of shares from the ETF could not happen fast enough.
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Old 08-30-2015, 11:04 PM   #82
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I think this shows the ETF's may not be as liquid as believed. The retirement of shares from the ETF could not happen fast enough.
Definitely. The liquidity isn't there when it counts. Not good.
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Old 08-30-2015, 11:10 PM   #83
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Some time in the pre-2000 era, before the age of the ETFs, I invested in and read prospectuses of a few HOLDRs (Holding Company Depository Receipts), the daddies of the ETFs. In there, the composition of a HOLDR is defined. For example a round lot of 100 shares of PPH (Pharmaceutical HOLDR) would consist of x number of shares of PFE, y number of shares of JNJ, etc...

To ensure that the HOLDR would trade at the exact NAV of the components, any owner of the HOLDR can request that his shares be broken down into the individual companies and the shares sent to him. And conversely, anybody can assemble the exact composition of shares, sent them to the managing trustee, and request the exchange for the equivalent HOLDR share.

The above two-way exchange ensured that no premium nor discount can exist with HOLDRs, because someone would arbitrage that out. Because the HOLDRs' compositions are exact number of shares of constituent companies, HOLDRs are only traded in round lots of 100s; one cannot trade fractional shares of constituent companies.

Owners of HOLDRs shares were considered owners of the underlying companies, and could vote their equivalent shares. That is not true with MFs or ETFs, whose trustees get all the voting rights.

There are a few other differences between HOLDRs and ETFs. I admit that I have not read any ETF prospectus in details like I used to read about HOLDRs.
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Old 08-30-2015, 11:39 PM   #84
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All the HOLDRs of yesteryear are gone. They were either dissolved, broken down to the shares of individual companies and sent to share holders, or converted into ETF form.

Some of the trading symbols like PPH (Pharmaceutical), SMH (Semiconductor), OIH (Oil Services) still exist, but are that of the new ETFs, not the old HOLDRs.
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Old 08-31-2015, 01:58 AM   #85
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Definitely. The liquidity isn't there when it counts. Not good.
I'm not sure what the underlying value of stock was in my ETFs were, but would like to think that they were not all that low. But I've heard people report how low they bought some big names.
The second no buyers are present or there are only significantly discounted offers, the price is can not be determined or it is at the discounted price.
We will likely have more days to test the liquidity theory coming up in the near future.
So I'm not sure if the mechanism for ETFs worked... or failed. Price is based on underlying intrinsic value and prospects for the future. The latter is a matter of opinion and a scared set of people can drop the value instantaneously.
It may just be liquidity issues for Monday morning. But I don't know how fast they can react as they are 3rd parties. This is not the ETF company itself?
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Old 08-31-2015, 09:06 AM   #86
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I don't think the ETF structure is at fault. The problem with Monday was some stocks did not open, and those that did were priced at huge discounts. In order to arbitrage the ETF to the underlying stocks the whole basket needs to be trading. Computers can do arbitrage in a split second keeping the ETF and underlying in line. Creation units, large blocks of ETF stock, are added/removed from the ETF by the arbs.
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Old 08-31-2015, 09:38 AM   #87
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I don't think the ETF structure is at fault. The problem with Monday was some stocks did not open, and those that did were priced at huge discounts. In order to arbitrage the ETF to the underlying stocks the whole basket needs to be trading. Computers can do arbitrage in a split second keeping the ETF and underlying in line. Creation units, large blocks of ETF stock, are added/removed from the ETF by the arbs.
Well, if some stocks weren't open, yet the ETF still traded, that is a problem!
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Old 08-31-2015, 10:01 AM   #88
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The SPY ETF trades before and after the market is open all the time, so not unusual.
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Old 08-31-2015, 11:56 AM   #89
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In this article Dave Nadig does a step by step analysis of the flash crash through RSP ( Guggenheim Equal Weight S&P 500 ETF). He has criticisms but argues that the market acted as it should have under the present set of rules.

Understanding ETF "Flash Crashes" — FactSet Research Systems
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Old 08-31-2015, 02:41 PM   #90
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Well, if some stocks weren't open, yet the ETF still traded, that is a problem!
Not really. Huge ETFs trade all the time even though the great majority of the holdings aren't actively trading at the same time. VWO, for example. The Emerging Markets mutual fund undoubtedly holds a few equities that trade with ADRs in the US but most of VWO's holdings trade only on foreign markets and therefore might have stale prices during the US trading day when ETFs are trading. They mention all this in the prospectus I recall and they even talk about different classes of holdings within the ETF that have different levels of liquidity and pricing information.
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Old 08-31-2015, 02:46 PM   #91
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I think this shows the ETF's may not be as liquid as believed. The retirement of shares from the ETF could not happen fast enough.
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Definitely. The liquidity isn't there when it counts. Not good.
I think you have legitimate concerns for some highly active ETF investors.

But is it really a big deal for us average investors? 8000+ hours of regular market trading has passed us by since the 2010 Flash Crash and then we experience 30 minutes of insanity for a limited segment of the entire ETF universe. That's 99.994% reliability.

And the issues were really only there for the sell side of the trade. Those of us on the buy side are pretty happy about things.
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