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Comment by chiph | Hacker News Reader

I'm still skeptical of ETFs as I see them as being a derivative product - not trading the original shares, but tickets representing them. So I see the same dangers/risks with them as with mortgage-backed securities.

While I may be acting like an old fuddy-duddy, there is this:

>Of the 1,278 securities halted for trading, 80 percent involved ETFs, according to the SEC.

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The difference is in the leverage. MBS blew up the economy because the banks betting on them were very highly leveraged and had more obligations than they could realistically pay out. An ETF is more akin to a share of stock in a company. The worst it can do is go to 0 and lose all value. It won't result in a 30x loss like a derivative would.

    not trading the original shares,

That depends on the type of ETF. As far as I understand a "Physical ETF" does hold the securities of the index it follows. In contrast, "Synthetic ETFs" track an index using swaps and collateral.

I assume they disclose what type they are? Also, any idea what the ratio of synthetic ETFs to physical ETFs may be? If it's low, it's not a potential market problem.

The ETFs I looked at do disclose this. I guess it's a legal requirement, since it affects risk structure. No idea about the ratio.

It's worth noticing many "Physical ETF" lend the securities they hold, in order to increase the ETF performance.

You own the real thing for example with SPY, which you can redeem to own the individual stocks. This of course cannot be true for all ETF-s, only the index funds.

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