written by reader Are ETFs safe in a doomsday scenario?

By rjpizza, July 11, 2020

I heard that “stocks only go up.” Ha ha. And so does the dollar. But what if? What if we experience rapid inflation, banks get into trouble, financial markets take a steep dive… you know, the doomsday stuff. I saw mentioned somewhere that ETFs are not safe in that environment. I guess they’re implying you should buy gold and bury it in your back yard.

But here’s a slightly more grounded question: In that environment, are stocks safer than ETFs of stocks? I’m hoping to read more than just guesses… Thanks!

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Travis Johnson, Stock Gumshoe
July 13, 2020 11:57 am

Stocks usually go up over long periods of time, but they have occasionally gone down for even as long as a decade. The dollar goes down over long periods of time.

As for ETFs vs. owning the underlying stocks, I would focus your worry elsewhere. In the very short term it is quite possible for either class to do worse if there’s a violent disruption in the market, but that should be very temporary — I’d be shocked if it occurred for more than a day. ETFs are maintained at NAV primarily through the mechanism of redemption — large institutions who are market makers in those ETFs can redeem the ETFs for the underlying stocks, and there is a profit incentive for them to do so if the ETF trades at a premium or discount.

I suppose it’s technically a little safer to own an asset directly rather than indirectly… but then you take on the additional risk of choosing the wrong individual stock, which is a dramatically higher risk than the risk that the ETF mechanism will be disrupted. If that’s your primary concern, you can also go with a mutual fund that’s not exchange traded, and give up that instant liquidity, since classic mutual funds always trade at their net asset value and can be redeemed only at closing prices each day so they avoid those kinds of “flash crash” moments when things get briefly out of wack.

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Travis Johnson, Stock Gumshoe
July 14, 2020 10:26 am
Reply to  rjpizza

Inflation shouldn’t make any difference for stocks vs. ETFs — the best protection from inflation is not gold, it’s investing in companies who have strong businesses and enough pricing power that they can raise their prices through inflation and not suffer much. The real loser is bonds, so the most direct protection from hyperinflation is probably shorting long-term bonds.

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