Somewhat surprisingly (given all the Trump headlines), Wednesday’s most popular post here at HR was “I Really – Really – Don’t Think This Is A Good Idea: ETF Edition.”
In it, I rehashed my all-too-familiar, common sense argument about ETFs. Here it is, in a nutshell:
What I do know is that if you step back from the unit creation/destruction process (which generally seems to be functioning well) and just abstract yourself a bit, this just seems like a bad idea.
After all, ETFs are kind of, sort of derivatives. Now there’s a vociferous debate about that and I’m really – really – inclined to say it’s just semantics. Because at the end of the day, you’re buying something that represents something else even if it is, in a way, also a manifestation of that thing it represents.
I then went on to highlight a bit of commentary from Deutsche Bank, who was – for all intents and purposes – out celebrating the fact that “ETF assets held by institutions and the number of products used by them have both grown more than 7 and 8 times in the last 10 years.”
(Deutsche Bank)
If you assume that the proliferation of ETFs is a good thing and if you insist on obfuscating by calling them “ETFs” in the first place, then that sounds really, really encouraging.
However, if you translate it and strip it down to the basics, it sounds horrible. Here’s what that actually says:
Institutions use of derivatives that have never really been battle-tested has exploded by a factor 8 since the crisis.
How does that sound to you?
Throw in the fact that these vehicles failed miserably when given a chance to prove themselves on the morning of August 24, 2015, and the writing is on the wall. As an aside, I remember that morning vividly. I was head-down in geopolitical analysis when my mentor pinged me and a colleague in the pre-market with the following “subtle” suggestion:
