The Nightmare Scenario: JPMorgan Warns Of $7.4 Trillion In ETF Selling During Next Downturn
- Thread starter Banjo
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So much for kolonovic’s ststement that systematic selling is done.
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I clipped a WSJ chart; massive selling in 2009, a huge uptrend year LOL. 2008 was green+ positive inflows, for funds; the worst possible way to do it.LOL Surprised not more selling in 2008-plenty of panic selling in 2008, for sure
Like a stopped clock being right twice a day (back in the analog days) I think ZH mistakenly hit on something just not what they thought they had. ETF selling is absolutely no different than any other selling that has ever occurred in the markets in the past. There's nothing new or particularly different about selling a basket of stocks with a push of a button vs selling an ETF made up of a basket of stocks at a button, it was all caused by an entity that decided to sell and the impact is exactly the same either way.
The right part may be the ETF's close cousin ETNs, which the vast majority of investors treat as interchangeable. If you want to talk about systemic risk, let's start asking how much exposure the issuers of ETNs have to a major drop in their underlying indexes. And how many people are treating ETNs as if they're ETFs rather than what they really are, unsecured debt of the issuer. Look at it this way, if an issuer's debt is trading at 5% while the risk free rate is 2%, then an ETN issued by them should trade at a 3% discount to an ETF tracking the same index. Actually more of a discount considering the ETN obligation is probably subordinate to the debt. Do they?
Do you want to talk systemic risk, what happens when an ETN issuer suffers massive losses in one ETN which causes all their ETNs, even those completely unrelated to the toxic ETN to become worthless. Actually worse than worthless, because at least then we would know their value, instead they all instantly turn into unsecured debt with an unknown value held by a bunch of different financial institutions with no institution knowing exactly how much exposure others have, or even if they did what that exposure is. Sounds a bit like 2008?
Do you think that, in and of itself, will lead to different panic selling scenarios than we've seen in the past?
I guess it depends on if the selling is coming from retail who were previously in similar mutual funds, in which case the effect would be similar? If not, the question would be if selling $x of a broad basket has a different impact on markets behavior from selling $x of a narrower subset. Maybe some interesting quirks in stocks considered "defensive" getting initially hit harder than they would have in the past because they're getting sold as part of the index, representing a short opportunity to buy immediately after the panic? Maybe short the index at the same time to isolate the effect?
I know right!! Alot of his articles are about how gamma and delta hedging move the markets. I thought that was only a drop in the bucket in regards to total volume. Do you have any insight on this?