Key insights
- The author questions the long-term usability of ETFs compared to mutual funds, arguing that their tradability introduces an additional layer of market volatility and emotional trading, potentially making them riskier than their underlying assets, especially in volatile markets. The piece suggests that ETFs like DRAM and NASA are detached from their underlying stocks, which are themselves detached from the broader market.
Recently I have been thinking a lot about purpose of etf, its tradability in market and its usability in long term value creation.
Suppose there are two types of people and their scenarios
-
If you want to trade or invest in real time with emotional waves and supply demand forces in the market, you have stocks.
-
If you want to invest with convenience and peace and without involving in emotional waves and supply demand forces directly which mutual fund managers handle for you, you have mutual funds.
Mutual funds are simple basket of stocks which is non tradable managed by fund and its return solely depend on selection of stocks and its timing of investment by fund manager.
With etf and its tradebilility in the market we are adding one more layer of emotional and supply demand roller coaster in the market over the basket of underlying stocks whose value is already affected by same factor.
This tradability of etf specially like DRAM and NASA makes them way riskier than its underlying stocks.
Right now DRAM and NASA is totally detached from its underlying stocks who are already detached somehow from the market.
So what's usability of etf in long term value creation specially volatile markets like current over mutual funds?