Quote:
Originally Posted by retiredguy123
I don't know much about ETFs, but it seems to me that, in the event that a volatile stock market event occurs, it could cause ETF investors to cash in large portions of their ETF investment, which would require the fund manager to sell off many stocks to raise the required cash. This would cause a disruption in the S&P balance and create a large capital gains distribution. I think this is less likely to happen with mutual funds because many investors are buy and hold investors, not active traders. My opinion.
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Not quite. A mutual fund creates shares when you buy it, and destroys shares when you sell it. You are buying from and selling to the company itself. An ETF has a (nominally) fixed number of shares bought by investment companies to resell to investors. When an investor buys or sells, s/he is buying from or selling to another investor, NOT the ETF itself.
So in the mutual fund case, there may be a need to sell off some underlying investments in order to meet the cash demands of redemption demands, which could ripple through the market or have a negative impact on the remaining fund investors in that they would pay tax on any resultant capital gains.
With an ETF, cash for a sale comes from the other investor who buys, so there is no need for the fund itself to meet cash redemption demands, so no sale of underlying investments, hence no impact on the remaining investors other than normal market fluctuation of the ETF price, as would happen with any stock.
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