Are ETF’s A Real Asset?
I’ve been participating in a comment thread with
Investopedia defines
A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange, thus experiencing price changes throughout the day as it is bought and sold.
Because it trades like a stock whose price fluctuates daily, an ETF does not have its net asset value (NAV) calculated every day like a mutual fund does.
Great, now we know what the public knows. Here’s what I don’t know. My question is “What’s the asset backing the ETF’s?” Are there underlying stock? And how can there be such frequent trading and movement of money in and out without triggering lots of buys and sells under these underlying securities? Are ETF’s a “bet tracker” of sorts?
Here’s A Counter-Point
I found an article titled ETF’s Are Not A Real Asset written by Christopher Laird. Now, usually I don’t quote such sources because I do not know who Chris Laird is or fully understand the concept in question. But I thought I’d refer to it in an attempt to gain some clarity. Please note that the article is really discussing ETF’s from a gold/silver (hard asset) ETF perspective.
Virtual Claims on Assets
In the article, my take-away thought is the idea that we are living in a world where virtual claims on assets are the norm. I can understand how it works with mutual funds, but am not clear on how ETF’s work. Just take a look at the currencies in your wallet. What asset are backing those up besides the government’s ability to collect taxes? The problem is drawing closer as the budget deficits keep growing in world superpower United States (another topic for the future)
Maybe I’m Crying Chicken Little
I’d appreciate if the ETF gurus enlighten me on what’s really going on. I’ve heard the tracker definition but would like a little more clarity than that. I stand humbled before you eagerly anticipating an enlightening discussion about ETFs.
