Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
FYI: On Dec. 10, Third Avenue Focused Credit Fund suspended its investors’ right to ask for their money back whenever they wish. That drastic step wasn’t unprecedented, however. It exposed a flaw that has always lurked within the heart of mutual funds — one that exchange-traded funds have largely solved. Regards, Ted http://blogs.wsj.com/moneybeat/2015/12/18/buy-the-etf-not-the-mutual-fund/tab/print/
"She must find a buyer in the market. In some cases, her broker sells the ETF shares to a specialized dealer called an “authorized participant,” who presents them to the fund company in exchange for an identical basket of all the fund’s underlying holdings."
My question: where does one find a buyer for the ETF? In a true market run, I doubt there will be many small investors buying the ETFs. The problem is that there's no requirement that APs participate. "Authorized" participant does not mean "required" participant.
APs normally make money by buying ETF shares at below NAV, redeeming them for the underlying assets, liquidating those assets near NAV (or holding them for their own portfolio), and pocketing the difference. If the assets are rapidly falling in price, an AP has to dump them quickly to preserve that profit - not possible with illiquid assets.
ISTM authorized participants will sit on the sidelines. They don't even know what the NAV is, anyway (unlike what happens in a rapidly falling market of liquid securities that are trading, perhaps frenetically).
This is not a knock on ETFs. I do seem them as being marginally different (neither better nor worse) than open end funds. You are likely to be able to sell your ETF shares to someone, somewhere, albeit at a fire sale price. That may be better than having your money locked up in an "open" end fund until the fund gets fair value (still low) for you.
Comments
My question: where does one find a buyer for the ETF? In a true market run, I doubt there will be many small investors buying the ETFs. The problem is that there's no requirement that APs participate. "Authorized" participant does not mean "required" participant.
APs normally make money by buying ETF shares at below NAV, redeeming them for the underlying assets, liquidating those assets near NAV (or holding them for their own portfolio), and pocketing the difference. If the assets are rapidly falling in price, an AP has to dump them quickly to preserve that profit - not possible with illiquid assets.
ISTM authorized participants will sit on the sidelines. They don't even know what the NAV is, anyway (unlike what happens in a rapidly falling market of liquid securities that are trading, perhaps frenetically).
This is not a knock on ETFs. I do seem them as being marginally different (neither better nor worse) than open end funds. You are likely to be able to sell your ETF shares to someone, somewhere, albeit at a fire sale price. That may be better than having your money locked up in an "open" end fund until the fund gets fair value (still low) for you.