Topic · Core Finance & Asset Classes
← All topicsFunds & ETFs
55 articles · 9 checkpoints · 33 deeper reads · 13 reference notes
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An ETF's trading volume tells you almost nothing about how easily you can trade it in size. Real ETF liquidity is inherited from the liquidity of what it holds, not from how often its own ticker changes hands.
ETFs and mutual funds can hold identical portfolios and still behave completely differently, because one trades all day on an exchange and the other is priced once and bought directly from the fund company.
A strategy that returns 30% a year on $50 million rarely still returns 30% on $5 billion. Every strategy has a capacity limit, past which its own trading starts eating the edge it is trying to capture.
When money pours into or out of a fund, the manager has to buy or sell the underlying holdings to match, and that forced trading can move prices independent of any change in what the assets are actually worth.
Net asset value is the fund's total assets minus its liabilities, divided by shares outstanding. It is the single number that determines the price at which fund shares are created and redeemed.
Instead of buying the underlying stocks, a synthetic ETF holds a basket of collateral and enters a swap with a bank that promises to pay the index return. It tracks perfectly on paper, but swaps a tracking problem for a counterparty problem.
ETFs stay close to the value of what they hold because specialist trading firms can create or destroy shares on demand, trading away any gap between the ETF's market price and its underlying basket.
A 2x leveraged ETF that resets its exposure every day can lose money even in a flat, choppy market that goes nowhere over the long run. The daily reset, not the leverage itself, is what quietly bleeds value.
A fund takes money from many investors, invests it as one pool, and gives each investor a proportional slice. That simple idea underlies mutual funds, ETFs, hedge funds and everything in between.
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