Are ETFs / Indexx Funds dangerous?

[engineering]

Something has been bugging me related to the rapid actions in to financial sector related to Russia/Ukraine:

Extremely quickly:
-Indices where changing their make-up
-Funds were selling off stock
-Transaction volumes crashed

Fund managers seemed to be tripping all over themselves to sell off customer assets at fire sale prices.

Regardless of whether one agrees with the politics of the current situation, it's useful to consider the possibility that such a behaviour could be repeated in the future.
Say, for example a state passes a law the a fund manager or index doesn't like. they can out of the blue decide to sell off assets in that state at fire sale prices.
This seems like a gigantic risk to me, one which is not present if one were to just buy the underlying stocks.

Has anyone else noticed this?
It seems like there are not protections at all regarding the make-up of indices, and the effect that a sudden change in their make-p might have on the customer. Am I right?

 

[Scataphagos]

ETFs and indices are "diversified" plays on the markets. As such, they are less risky than individual issues. They have a "theme/sector" or "charter" by which they invest. So even when they're swapping positions around, they're still in the same arena of their charter.

Leveraged ETFs carry additional risk, of course.

 

[KGTrader4]

If it’s a true passive index fund, the only catalyst for selling assets is shareholders selling the etf.

 

[deaddog]

If it’s a true passive index fund, the only catalyst for selling assets is shareholders selling the etf.

Doesn't the value of the ETF depend more on the underlying index than on the shareholders supply and demand.

 

[markthepadrone]

Great question. I've often wondered how efficient the ETFs are. Is there any room for arbitrage?

 

[KGTrader4]

Doesn't the value of the ETF depend more on the underlying index than on the shareholders supply and demand.

yes, but if a shareholder sells 1000 shares, manager must sell a % of each stock in the index to raise the cash, no? Point is, they aren’t picking and choosing what to sell. They create or liquidate a share by selling a % of each stock n the index

 

[engineering]

If it’s a true passive index fund, the only catalyst for selling assets is shareholders selling the etf.

Or a change in the index composition....
Which is what I'm considering a risk.
A group running an index could change the index composition at any time for any reason. Immediate fire sale follows from passive funds.

 

[KGTrader4]

Or a change in the index composition....
Which is what I'm considering a risk.
A group running an index could change the index composition at any time for any reason. Immediate fire sale follows from passive funds.

Yes, that comes with the territory. s&p 500 makes changes periodically. Whenever that happens, it always seems orderly to me. The stocks going in and out are volatile, but the index / ETF manages to stay orderly in how it trades.

 

[Scataphagos]

Doesn't the value of the ETF depend more on the underlying index than on the shareholders supply and demand.

yes

 

[Cabin111]

Examples...Oil and gas. Is it drilling or manufacturing or distribution...Any or all could be in it. Can you add shale production?? It can change unless the prospectus says otherwise.

Here is PEO, Adams Natural Resources Fund's top ten companies...Oldest oil and gas related fund out there.

TEN LARGEST EQUITY PORTFOLIO HOLDINGS (12/31/21)

% of Net Assets

Exxon Mobil Corporation

15.9%

Chevron Corporation

13.8%

ConocoPhillips

7.3%

EOG Resources, Inc.

4.5%

Linde plc

4.3%

Marathon Petroleum Corporation

3.7%

Schlumberger N.V.

3.3%

Sherwin-Williams Company

2.7%

Valero Energy Corporation

2.7%

Devon Energy Corporation

2.4%

Total

60.6%

Notice they have Sherwin-Williams in there. Very broad at what they can invest in...