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Over the past couple of weeks, I have been focusing on the growing issue between passive investing and bloated ETFs... and I've gotten some great questions from readers who want to know more.
When this crash comes, whether it's a "flash crash" or far more serious, I want my readers to be prepared to rake in serious profits while everyone else is in free fall. And I'm happy to take the time to address your specific questions if that means you will all be ready.
If the coming crisis with ETFs is so obvious, why doesn't anyone else seem to see it? - Anish
Good question! There are reasons hardly anyone is focusing on these very serious issues. Firstly, the "out of sight out of mind" people foolishly tend to believe that if it's out of sight, it must have been fixed.
It's frightening, but we never got an answer as to what caused the May 2010 flash crash. We recovered, and there was a lot of hand-wringing for a short while... then nothing. It's like it never happened, or since we bounced right back it must not have been a big problem, or it was addressed and we don't have to worry about it. This is just not true.
The same faulty logic applies to the Aug. 24, 2015, market opening and then total flameout. Some stocks didn't open, lots of ETFs couldn't be priced, prices fell through cracks in floors no one knew existed, and stop orders got ripped through and filled substantially lower than investors expected. Was that all fixed? Heck no. But because it hasn't happened again, people think it was figured out and fixed. NOT so. At all. It was just swept under the rug. So, if out of sight is out of mind, then why worry about something that's thought to have been fixed?
Secondly, the growth of ETFs is so good for business, no one is willing to stop that train or stand in front of it. That includes ETF regulators. But putting your head in the sand can only last so long. Eventually you suffocate, and when you come up to see what the landscape looks like, you may not recognize it. That's what we're going to see one day soon.
Are there any ETFs that seem safer than the ones you mentioned, like SPY? Is there a way to passively invest without contributing to the crash you see coming? - Carol
No. None of them are safer than any others. As my dear mother used to say, "They're all tarred with the same brush."
The nature of ETFs - being derivatives of underlying stocks, which are often glued together as indexes - guarantees that any strong selling of the underlying issues will cause the derivatives to react. And it's faster to sell the derivatives than all those individual underlying stocks, …
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.