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Minyan Mailbag: ETFs and Index Funds



Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next column with that very intent.

Prof. Succo,

I just wanted to say thank you for the exposé on the ETF-Index Fund connection. I had wondered how the trusts that run the ETFs were able profitably to go buy the underlying stocks and then sell the trust shares, and it never occurred to me that this is just a "meat byproduct" of the index funds carcass. (Like Minyan Ron, I too have occasionally been unable to short, in my case, the QQQQs, and had to scratch my head.)

So that makes me wonder: what other not-intuitively-obvious-to-the-casual-observer behaviors do index funds engage in, to enhance their returns or otherwise, that indirectly affect traders?

Thank you, again.

Minyan Ben


They will swap futures and cash aggressively depending on valuation. I have also known index funds to use options to sneak in a few basis points when they can, although that is not widely done.

They will also take some leg risk, as exemplified in the Gap (GPS) situation. They may buy some ahead of when the event is struck and some behind in an attempt to outperform the index.

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