ETFs or exchange traded funds have been marketed as a great way to access large numbers of stock holdings and average the returns.
In trying to unload a rarely traded ETF to cover our mortgage down payment I’ve come to realize that marketing is not necessarily true; I’m extremely embarrassed b/c I believe I’m fairly finance savvy.
ETFs in their marketing say “we will hold and attempt to match the stocks of the underlying benchmark”. That’d lead you to believe if the underlying benchmark goes up then so do the stocks. But, owning 1 share of an ETF does not entitle you to 1/10 of the 10 holdings within the ETF and you cannot sell off the individual holdings for whatever the value of the given stock.
An ETF is a great idea for dividend paying stocks, bonds, or anything else that returns real money to shareholders. But a buy & hold ETF is only worthwhile if the actual ETF stock is traded often enough that you can sell said ETF stock.
All I can say for myself is face/palm and I’m embarrassed I fell for the marketing hype in the 90/2000’s without digging deeper.
Let’s say, I go to 9 friends and we each invest 1/10 of the cost. I then buy a rain barrel and water purifier. We share and each get 1/10 of the pure water. What value do the 9 friends have? It’s not actually 1/10 of the value of the rain barrel, unless that’s in the original purchase contract; the 9 friends actually only own 1/10 of the future output of purified water. I, the underlying original purchaser owns the rain barrel and purifier. If one of the 9 friends wishes to exit their position in the water purification they can sell their share to someone else who wants pure water but they can’t actually sell 1/10 of the assets because they don’t own it.
its actually a bit worse than you might think. There might be 100 out there looking to buy a rain barrel and purifier, but if there’s only 1 person looking to buy “a 1/10 share in a rain purification investment” then there’s actually only a 1-person market for this specific investment. So tying this back to stocks, there might be 100 investors looking to buy IBM stock (one of the S&P500 shares) but if there’s only 1 person interested in buying an S&P500 ETF then the market is only 1, not the 100 underlying people.