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  • Writer's pictureIshfaaq Peerally

The Dangers of ETF Investing

The amount of money in passive funds now exceeds the amount of money in active funds. It makes sense since most active funds fail to beat the market. But when everybody is doing something in the markets, you need to be careful. Let's understand how ETFs, exchange-traded funds, work first so that we can look at their dangers. ETFs are just like mutual funds, hedge funds or index funds but they can be traded instantly like stocks on an exchange. ETFs are supposed to track something and through a redemption mechanism, the ETF managers make sure that the ETF is doing its job by actually tracking what it is supposed to. During the redemption mechanisms, there are market makers which buy or sell the underlying assets to the ETF and the ETF has to create or merge its shares. What are the advantages of ETFs? They give you diversification and they have low fees and commissions. The first disadvantage of ETF investing is the passive investing bubble. Michael Burry talked about the passive investing bubble last year. When you invest in the SPY ETF $SPY , State Street which owns this ETF will buy shares of the companies on the S&P 500 $SPX500 . Today, most of the big companies are mostly owned by ETF companies such as Blackrock, Invesco and Vanguard Group. These companies are not going to execute voting rights in the companies they own and therefore, incompetence is tolerated on company boards. When you invest in ETFs, you're buying high and selling low since most of the money will be used to buy the largest companies on the ETF, pushing the stock prices even higher. Another danger of ETF is that there's too much money in the ETF that they cannot be backed by real physical assets anymore. This happened with the USO ETF $USO recently as they could not buy short-term oil futures contracts anymore and started buying long-term futures contracts. It is happening with the GLD ETF $GLD too according to Jeffrey Gundlach as more and more people are investing in the ETF and the ETF are only promising gold deliveries with some certificates. Can they really provide all this gold? Another risk is that the ETF changes its rule like the USO recently did. The Junior gold miner ETF $$GDXJ can no longer buy big small gold miners, so they are now investing in bigger gold miners, even those on the GDX ETF. Active ETFs such as the ARKK ETF of Cathie Wood are flourishing everywhere. They try to mimic hedge funds but are apparently safer but this is not really the case. You need to do your research before investing in any ETF, active or passive. Before making any investment in an ETF, make sure you understand what you're buying. What are the underlying assets. What are the risks. ETFs are safe but don't they can be dangerous in the future, so you always need to be careful. There is no such thing as a zero-risk investment. Watch the full video on YouTube and Subscribe: You can find all my analyses on my research partnership: Join my private investing group on Facebook for more:

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