My main qualm about these is that if enough people own them, they can become just as volatile as single stocks. There is no such thing as a set-and-forget investment.
- NF
Excellent observation!
The underlying market (whichever market the fund is tied to) can be expected to increase (probably faster than inflation), correct?
That's an assumption that I question, if "the underlying market" is traded as a single security, in volumes that are a sufficient fraction of the total volumes traded. If enough people decide to buy or dump S&P 500 funds (compared to those who are trading the component stocks individually), the S&P 500 will behave like a single stock.
I vaguely remember a similar situation in the 1980s, when some statisticians figured out how to control risk and started playing the market. They made billions, they couldn't lose -- until they started playing with amounts of money that were large enough to perturb the stats they were measuring. Then the market went nuts and they couldn't control a thing anymore. (I've searched for references but didn't find anything.)
- NF
The underlying market (whichever market the fund is tied to) can be expected to increase (probably faster than inflation), correct?
That's an assumption that I question, if "the underlying market" is traded as a single security, in volumes that are a sufficient fraction of the total volumes traded. If enough people decide to buy or dump S&P 500 funds (compared to those who are trading the component stocks individually), the S&P 500 will behave like a single stock.
I vaguely remember a similar situation in the 1980s, when some statisticians figured out how to control risk and started playing the market. They made billions, they couldn't lose -- until they started playing with amounts of money that were large enough to perturb the stats they were measuring. Then the market went nuts and they couldn't control a thing anymore. (I've searched for references but didn't find anything.)
- NF
that might be true in the short term. But in the long term the market, which basically represents the American economy, will revert to its true value.
Like others said, ETFs are nice because they have a very low expense ratio. I no longer believe in giving a fund manager figures approaching 1% for mediocre performance.
The only ETF I have money in currently is S&P Deposits Reciepts also know as SPDR "spider" Symbol 'spy'.
I vaguely remember a similar situation in the 1980s, when some statisticians figured out how to control risk and started playing the market. They made billions, they couldn't lose -- until they started playing with amounts of money that were large enough to perturb the stats they were measuring. Then the market went nuts and they couldn't control a thing anymore. (I've searched for references but didn't find anything.)
Something like that happened to Fidelity Magellen fund int he 1990s, wher eit got so big because it was the most populat 401K investment fund, that pretty much anything it did with regards to money put in by investors influenced the entire market.
Anotehr intersting thought- there are more stock mutual funds out there than there are stocks traded on NYSE and AMEX