Why are ETFs regarded as "weapons of mass destruction?"
I can't find a straight-forward answer to this question online but it is being throw around a lot. But there are articles from years ago about the Fed, and other sources claiming that ETFs are responsible for the market sell-offs that happen insanely fast so it holds some weight.
My initial thought it was since an ETF represents a certain "basket" of equities, it's gotten to the point where many traders pile into ETFs rather than single stocks. In return, the ETF will move the stocks within that basket, not the other way around. I looked into it a little more with Facebook news hitting the wire about their privacy issues. FB, NVDA, NFLX, and AAPL all had near identical daily movement despite the other 3 having nothing to do with FB. But since they are all under the QQQ ETF, they will all have similar movement despite fundamentals.
Aside from that I don't know how it would contribute to the sharp drops like we saw in February. My guess on that is just margin calls, and rebalancing in those ETFs moving everything within it's portfolio in the same direction, at the same rate, all at once. One interesting thing is that there are more ETFs than individual stocks as well.
The plain jane ETFs (think the ones in grandpa's mutual fund) are a non-issue.
Think SPY, QQQ, IWM, EEM, etc etc. They provide investors with reduced transactional costs (cheaper, as opposed to buying individually the basket of stocks).
The problem comes with leveraged ETFs, particularly those that leverage volatility (which in itself, are already "leveraged" due to the inherent put/call magnification being skewed).
So think UVXY, SVXY (rest in peace). To a lesser extent, 3x levered commodities ETFs are also suspect, and have been known to move the commodity itself (tail wagging dog phenomenon).
My point is, unless you're trading volatiliy ETFs and/or a 3x ETF that tracks a volatile commodity/currency, ETFs are perfectly sane, conservative, and prudent ways to deploy your capital.
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