I’m not too sure about this thought but am wondering.
Derivative funds (by which I mean things like a mutual fund tracking index X or the SPY that tracks the SP500) are said to have more invested that the underlying asset (e.g. SP500 versus all the SP500 tracking funds). This doesn’t fully make sense to me as all those derivative products just end up investing (largely) in the underlying index basket.
Sans the funds, all that money would be going into the assets underlying the index, right? If so it’s not clear that the funds via the direct investment in the non-derivative world would be much different or even more “correct” that what the collection of funds produces.
However, in a sense the funds all substitute for quantity in the market. Their prices will be anchored off the underlying index but when the fund is bought an sold it is often between two sides buy/sell the fund shares and no change in the funds holdings occurs—so no marginal trading in the underlying index assets occurs due to those trades. I suspect that would hold when you look at fund A having $1,000,000 sold and some other fund(s) getting $1,000,000 bought. Effectively even if these funds change their holdings the net out in the market of the actual index assets.
Can this actually lead to a more stable, better priced over all market or am I missing something?
Note, I get that some of the highly leveraged funds will possible produce somewhat different outcomes, as will general net outflows/inflows of total investment in the derivative funds just as direct flows for the equities underlying the particular index.
I’m not too sure about this thought but am wondering.
Derivative funds (by which I mean things like a mutual fund tracking index X or the SPY that tracks the SP500) are said to have more invested that the underlying asset (e.g. SP500 versus all the SP500 tracking funds). This doesn’t fully make sense to me as all those derivative products just end up investing (largely) in the underlying index basket.
Sans the funds, all that money would be going into the assets underlying the index, right? If so it’s not clear that the funds via the direct investment in the non-derivative world would be much different or even more “correct” that what the collection of funds produces.
However, in a sense the funds all substitute for quantity in the market. Their prices will be anchored off the underlying index but when the fund is bought an sold it is often between two sides buy/sell the fund shares and no change in the funds holdings occurs—so no marginal trading in the underlying index assets occurs due to those trades. I suspect that would hold when you look at fund A having $1,000,000 sold and some other fund(s) getting $1,000,000 bought. Effectively even if these funds change their holdings the net out in the market of the actual index assets.
Can this actually lead to a more stable, better priced over all market or am I missing something?
Note, I get that some of the highly leveraged funds will possible produce somewhat different outcomes, as will general net outflows/inflows of total investment in the derivative funds just as direct flows for the equities underlying the particular index.