Nussbaum
2021-09-06 06:10:32
- #1
ETFs are, as long as they do not exceed a critical mass in the market and no real financial crisis occurs, the almost perfect investment vehicle. So far, so clear. Disadvantages compared to a sufficiently diversified, larger number of directly held individual company stocks spread across countries, sectors, and risk profiles: - In some indices like the SP 500 and MSCI World, a large portion of the index is held by ETFs. In market distortions such as short squeezes, etc., these may trade automatically, which can result in losses. Furthermore, there is a quasi pre-programmed disadvantage when the index composition changes. - Synthetic ETFs carry a risk if a counterparty defaults - The vast majority of ETFs, including physically invested ones, are allowed to lend a certain portion of the stocks, for example to short sellers and other speculators. If these fail, part of the ETF could fail.
All these disadvantages you do not have with direct investments in individual stocks, but there are double taxation issues in certain countries and the risk of insufficient diversification.
But if you are such a complete professional as it seems, you can certainly completely refute all these points and explain to me why ETFs are absolutely and fully superior in every respect compared to broadly diversified direct stocks.
I did not write, "just no ETFs." I wrote that a certain portion in direct company stocks can certainly make sense from a risk perspective.
I have to admit that I initially underestimated your knowledge. Sorry.
The risks you listed are valid. Do you know of examples of large ETFs that have significantly underperformed the index in the past (e.g., due to failures from short sellers, etc.)? Regarding the "critical mass" in the market: according to my research, the share of ETFs in the MSCI World is estimated at 17%.
However, ETFs also offer advantages that in my opinion outweigh the disadvantages: - Broader diversification than is possible with our limited capital. - Automatic rebalancing - Fewer transaction fees due to larger transactions. - Investing also in unknown titles
From my personal experience, private investors tend either to only add hype stocks to their portfolios or very well-known stocks like Microsoft or Apple, which are already strongly represented in the index. I have done stock picking myself in the past and was actually almost always outperformed by the index/ETF. Thus, I have completely switched to ETFs (even though I have different ones).