Aren't ETFs Basically Just a Pyramid Scheme?

LCheer on 14/08/2021 - 10:07

Has anyone noticed that ETFs are becoming the next pyramid scheme? Everywhere you see financial advisors recommending ETFs. It's crazy, people don't even do research anymore. It's sad.

People complain about people investing in random cryptocurrencies, but when I see people recommending index funds, isn't it really just this one principle "Asset Price Scarcity" being put into play. It's a self-fulfilling prophecy if you get enough people to buy into the index funds hype.

The only reason why it rises on average is because people keep pumping whatever asset it may be, but should we be doing so?

Financial

Comments

  • lubos on 14/08/2021 - 10:12
    +169

    Wow…. what did I just read?

    • Scrooge McDuck on 14/08/2021 - 11:35
      +73

      Ignorant drivel from an alternate account.

    • poboy on 14/08/2021 - 11:36
      +16

      Someone who thinks an EFT is a Beanie Baby.

    • CalmLemons on 16/08/2021 - 20:12
      +6

      For OP: You need to DYOR. DO YOUR OWN RESEARCH.

      Index funds, e.g. SPY outperforms individual investors on average, because individual investors are emotional, often ill informed beings.

      Index funds track underlying assets/parts of certain financial markets.

      The price to pay for knowledge is about the time it takes to read 10-20 books on the subject, or you can throw away $10-20k of your savings. Either way, gotta do the work.

  • andrek on 14/08/2021 - 10:15
    +38

    Pyramid scheme? No
    Hyped up over past year or so? Maybe. But if you are there for a long term ride - does it matter?

    • cameldownunder on 16/08/2021 - 10:55
      -3

      The whole share market is now ( and was 2000 ) a huge giant Ponzi scheme.

    • cydia9k on 17/08/2021 - 14:20

      I wouldn't say hyped up because they are a pretty solid investment vehichle, but it will dip back down over time. Some will move to more active investments/buy shares, some paper hands will fold, some will go all in on NFTs and live to regret it

  • tomleonhart on 14/08/2021 - 10:17
    +33

    I smell chip on shoulder. If people don't do research and lose money, I'm happy, because I win.

    If you think ETF is a shit investment, you should be happy that people are buying into it. That leaves the quality investment cheap for you to buy.

    And no, ETF isn't a pyramid scheme.

  • GoldenDragon888 on 14/08/2021 - 10:19
    +16

    Troll!

  • Phlume on 14/08/2021 - 10:23

    As with all investment, there's always going to be risks. Do your own research and use other people's advice as a guide.

  • brendanm on 14/08/2021 - 10:25
    +8

    Lol wtf. It's you who needs to do some research.

  • CyberMurning on 14/08/2021 - 10:25
    +3

    If etf for you is ponzi then it is same as covid is hoax…

  • mbck on 14/08/2021 - 10:26
    +44

    Do you know what a pyramid scheme is?

    Because it definitely sounds you don't.

    Do you even know what etfs are?

    Because again, it definitely sounds you don't.

    Gosh I hope you're not one of those financial influencers rolls eyes

    • cameldownunder on 16/08/2021 - 11:00
      -8

      Pyramid scheme is when the people at the top of the pyramide ( buying shares early ) are getting the money ( selling shares ) at the costs of people joining late ( buying shares of the people leaving ). So the share market is in itself a Pyramid scheme: as long as there are new investors putting in money, the people at the top can rake in the money ). Only when there is no more finance at the base, that the prices crumble and late investors lose their money.
      Sounds like a pyramid alright.

      • pippohippo on 16/08/2021 - 11:13

        pump and dump of speccies

      • andrek on 16/08/2021 - 14:11
        +3

        While share prices can definitely be affected by the amount of capital available on the market (more ppl want to invest = higher share prices), that is insignificant over long term. This year there are millions who want to invest in share market, next year they move their capital to property, the year after that they move it to bonds, etc. Over the long term, all volatility due to this capital movement will level out.

        Beyond that, the company share price is determined is by the value of that company's business. If the company is solid and constantly growing - yes, the earlier you get the more rewards you reap. But if the company is mismanaged - it's the opposite. Over long term share prices go up and down based on the value of company business, not on who got in early or late and how many want to get it/out. And an ETF is just a sum of a few companies' shares, so same rules apply.

        • cameldownunder on 16/08/2021 - 20:58
          -1

          You believe that. Fine with me, as I have stopped playing the Share Market Game a while ago.

          • johnno07 on 17/08/2021 - 07:15

            @cameldownunder: So you just sit your money in a savings account with an interest rate lower than inflation?

            • cameldownunder on 17/08/2021 - 08:52

              @johnno07: I would if I had money. But even if I had, maybe just letting them be there till this ponzi scheme blows up ( see 2000 and 2008 ) and then play the game, is better than getting in now.

  • MrHyde on 14/08/2021 - 10:44
    +2

    How is an ETF different from a Mutual Fund that you invest in with various parties like BlackRock etc. Only thing I see different is that they are listed on ASX. Does it mean they are more regulated?

    I put some money in Mutual Funds in 2006. Wondering if they are just the same thing or not.

    • mbck on 14/08/2021 - 11:17
      -3

      Etf -> follows index fund

      Mutual funds ->can be any stock/index fund that a fund manager deem fit for whatever the mutual fund purpose is.

      Dyor on pros and cons

      Side note, I can't believe people just put money in whatever. Then they (not necessarily you) blame the banks for whatever happens.

      • sangohan on 14/08/2021 - 18:46
        +16

        Etf -> follows index fund

        people often confuse the name "ETF" with index funds.

        ETF is the name of the financial instrument, like bonds, or stocks, or loan notes.

        ETFs don't have to be an index fund. Cathy Woods' fund is an ETF.

        Mutual funds are the same - it's a form of investment trust. Most mutual funds are active investment funds, but there are also quite a few that are index funds.

        • Vagon on 15/08/2021 - 07:44

          +1 essentially one (ETF) is traded publicly and the other isn't.

          There are plenty of actively managed ETFs and index tracking mutual funds around.

        • Chandler on 16/08/2021 - 06:31
          -2

          And if you're investing in ETFs just to have it follow an index, you're doing it wrong.

          Part of the point of (some at least) ETFs is that they (try to) outperform the index.

  • Jimothy Wongingtons on 14/08/2021 - 11:17
    +1

    It’s no SAFEMOON

  • Seraphin7 on 14/08/2021 - 11:24
    +2

    Wow. Time to invest in cancer stocks.

  • DrRalph on 14/08/2021 - 11:26
    +15

    "Aren't ETFs basically just a pyramid scheme?"

    No. Seems you don't have any understanding of ETF's at all.

    • johnno07 on 17/08/2021 - 07:15
      +3

      Or pyramid schemes.

    • SlickMick on 15/08/2021 - 14:15
      -2

      There are a lot of ETF lovers here. Speaking against them will get you downvoted.

      The buy/sell spread on them is huge. They only work as set-and-forget, and most people don't notice/care that they're paying a huge price on exit.

      • Devils Advocate on 16/08/2021 - 21:39
        +2

        Huge spreads? Most are 0.5% between the market maker prices, and if you don't like that you can put a price limit order in to pay essentially no buy/sell spread.

        • SlickMick on 16/08/2021 - 22:22

          Want to give me an example to lookup? I'm sure I've seen worse. But even 0.5% is a more than I'm willing to spend. Stocks with good liquidity are 1/10 of that.

          How does a price limit order change the liquidity??

          • Devils Advocate on 16/08/2021 - 23:17

            @SlickMick: Market makers aren’t active in non-trading hours, but have a look at VDHG tomorrow. Or another large ETF. The more niche the fund the more a market maker will charge.

  • Donaldhump on 14/08/2021 - 12:38
    +8

    when I was a young boy in Albania, my dad sold our 16 chickens, Mercedes Benz, and my sister and invested the money into a government fund. We lost it all. If you want to know what a pyramid scheme is youtube that one

    • dandosr on 14/08/2021 - 13:06
      +12

      man you know an Albanian is having a rough time when they have to sell their Mercedes

    • mickyb80 on 14/08/2021 - 13:19

      Did your old man keep the sheep?
      Prob should have sold them too and not been so selfish! That's where he went wrong!

    • mandelbrot on 15/08/2021 - 22:24
      +2

      He should've bought those magic beans.

      • [Deactivated] on 17/08/2021 - 12:46

        he sold those when he sold the sister

  • mickyb80 on 14/08/2021 - 13:17
    +2

    Westpac offers 3% on a savings account for people aged between 18-30 I think. Does that mean they are being discriminative towards younger and older members of the population?

    3% is pretty good for the current climate - maybe find a way to pump some money in there?

    🤦‍♂️

    • kipps on 14/08/2021 - 17:55
      +9

      3% interest less income tax won’t even keep up with inflation. Bank accounts aren’t for long term investment.

      • mickyb80 on 14/08/2021 - 20:15
        +7

        aaahhh… I think you will find I was being sarcastic… 🤦‍♂️

  • tommohawk on 14/08/2021 - 14:45
    +4

    ETF's of index funds are basically a collection of profitable businesses, so, no, they are not a pyramid scheme. You can't argue that a stream physical cash (cash profits from these businesses being paid out to its owners) being deposited into your bank account every year, which also grows over time, is fake, not real, or bogus somehow.

  • pndl on 14/08/2021 - 17:46
    +8

    It is an interesting theory.

    Based on the market efficiency hypothesis, various actors in the market have already priced those companies correctly, and the market cap of each company is a true representation of its value. So the best thing to do is to just follow and invest accordingly as there can be no advantage gained by spending time researching too much.

    Which brings in ETFs, which typically invest in companies proportional to market cap of each company on the index without much thought about underlying value.

    However as more and more people do this, more and more investment is blindly going into companies just because they have proportionally high market cap, rather than any other reason.

    It can become self fufilling. The market cap of these companies increase (as the price increases), and people invest more into them due to high market cap. The market cap of these companies can become detached from its value.

    • avoidfullprice on 15/08/2021 - 08:46
      +3

      It can become self fufilling. The market cap of these companies increase (as the price increases), and people invest more into them due to high market cap.

      ETF manager also does rebalancing based on its asset allocation. So it will either buy more of the other asset or sell the higher cap asset. It is not entirely a positive feedback construct as you describe

      This is on top of the underlying indices doing quarterly rebalance and add/remove companies from the index. eg asx200

    • Vagon on 15/08/2021 - 08:48
      +2

      I upvoted this, but I will say you missed the other mechanism here which is by having a high share price these companies have a cheap cost of capital.

      I.e. if management and the board think the stock is over priced they can (usually) issue more stock and use it for growth initiatives. If these initiatives are successful then they get more revenue/lower cost/insert goal here.

      This means the price is both initially reduced due to additional shares and the initiatives make the company worth more.

      In other words there is a virtuous cycle that to an extent stops the prices from being detached.

      It's the same reason why ESG funds work. They're not actually investing in green or social initiatives, they're just investing in stock already on the market. This sort of inflates the cost of ESG stocks making the PE of non ESGs better. But really it's making the cost of capital for the ESG companies cheaper for investing in more ESG projects.

    • spurf on 15/08/2021 - 09:50
      +4

      Not a critique of ETFs in general but there are legitimate concerns that index ETFs and funds are now getting to the size where their movements are distorting the very markets they are trying to passively follow

      https://www.bloomberg.com/news/articles/2021-01-13/trillions…

      • kipps on 15/08/2021 - 14:41
        +3

        The counter point to this is addressed at https://www.youtube.com/watch?v=Wv0pJh8mFk0

        • garygaz on 17/08/2021 - 02:30
          +1

          i work in markets and i can say with a high degree of certainty a combination of index funds and large index funds is causing huge movements on stocks joining and being removed from indices. a lot of research shows there is a lot of positive/negative momentum in the stocks for sometimes months after the rebalance date

          • kipps on 17/08/2021 - 07:48
            +1

            @garygaz: If this were causing price distortion then we can expect active managers to outperform the indexes by simply buying/selling before stocks transfer in/out of an index. Are there examples of such active managers outperforming?

            • garygaz on 17/08/2021 - 10:56
              +1

              @kipps: yep there are a lot of hedge funds out there, you can view them through morningstar or investsmart using their fund filter. i'd rather not name any directly on here but look for funds that describe their trading style as 'momentum' or 'market event based' or a variation of that. but it is important to note that a lot of active managers don't 'trade' or use quantitative based measures to run their entire funds, this is more likely a hedge fund style investment.

    • SlickMick on 15/08/2021 - 14:26
      +1

      You forget that there are also sensible investors out there that are selling high to the moron ETF managers you speak of

  • Geoff-bargain on 15/08/2021 - 09:04
    +2

    So Michael Burry thinks they are a bubble. Here's one link but Google for many more.
    https://money.usnews.com/investing/funds/articles/do-index-f…

    But Warren Buffett is leaving instructions for his wealth to be put into them when he dies so his family will be looked after.
    https://www.forbes.com/sites/robertberger/2020/11/24/how-to-…

    This also popped up when I googled
    https://youtu.be/7-QVD8kPx1I

  • afah0447 on 15/08/2021 - 09:31

    Wow. I dont think you know what an ETF actually is. Look into it and then take a look in the mirror.

  • snooksy on 15/08/2021 - 10:00
    +1

    The rules around financial advice are quite clear that people cannot offer personal financial advice without fairly rigorous qualifications, ie a degree and certification. I expect a lot of the advice OP has heard is not personal in nature. Unfortunately personal financial advice these days requires you have a portfolio in the hundreds of thousands of dollars, and personal advice starts at about $1500 because the advisor has to spend upward of 20 hours putting it together.

    Therefore general advice to the broader public must be general in nature and low risk - ETFS!

    There isn’t regulation around offering advice on computationally expensive random number generators so any whiz kid with a blow horn can crap on about ABC coin and not face possible penalties from a regulator, nor need to worry about the coal burned to generate random numbers and push up GPU prices.

    I will add one point that if a market pops with ETFs there is a risk of things being oversold because the algorithms sell to follow the indices along with holders selling not to lose money so the effects may be overblown and oversold due to momentum. This has yet to be tested properly because ETFs were a smaller slice of the global markets than they are were say at the last big sell off in 2008.

    • rarelyscene on 16/08/2021 - 08:41

      What happened during March 2020 sell off?

  • RecklessMonkeys on 15/08/2021 - 11:03
    +8

    What you're describing is more like a bubble than pyramid.
    A bubble is basically too much money chasing an asset class.

    A pyramid scheme requires each new investor to recruit multiple, other new investors.
    A ponzi scheme uses money sourced from others' purchasing the asset to fund distributions.
    Pyramids and ponzi eventually collapse and are typically illegal.

    Bubbles also eventually collapse.

    They can all go on for a long time before they run aground.

    I do think you've hit a nerve here. Investment is an emotional process, so when you imply that people have done their money, you'll get a negative response.

    • GOCAT9 on 15/08/2021 - 11:31

      I think you hit the nail on the head!

    • mandelbrot on 15/08/2021 - 22:27

      That's why you need to avoid bubbles and buy Doge.
      1 Doge = 1 Doge

  • bigsaver on 15/08/2021 - 21:33

    Is this a new conspiracy theory? How did you come up with that mate?
    You buying companies when you buy an ETF. Yes individual companies can (almost always are) overpriced by some metric in which case the ETF also is… but it's got nothing to do with pyramid scheme… If an EFT crashes it's just because the individual shares that make the ETF up crashed

    • HeWhoKnows on 15/08/2021 - 21:57

      Sometimes the shares are under-priced when the market (or sector) has been sold down heavily

    • steeevo on 16/08/2021 - 07:14
      +1

      That isn't necessarily correct is it?

      When you buy an ETF you are buying an interest in an instrument which holds shares in companies.

      While there should be a correlation, the value of your ETF units are actually not mechanically linked to the value of the underlying companies. The value is based on what someone else is willing to pay for it when you want to sell.

      For example, if something happened which shook confidence in Vanguard, the value of your VAS units could tank even though nothing has happened to the underlying shares they hold.

      I still don't think it is a pyramid scheme but it isn't as bulletproof as people like to think.

      • trongy on 17/08/2021 - 22:49

        the value of your ETF units are actually not mechanically linked to the value of the underlying companies

        The value of the ETF's investment pool is mathematically linked to the value of the underlying companies.
        e.g. VAS tracks the S&P/ASX 300 Index. The market cap of CBA 7.5% of the total S&P/ASX 300 Index so Vanguard will target 7.5% of the VAS investment pool, and so on for each of the companies in the index.

        The value is based on what someone else is willing to pay for it when you want to sell.

        Here's the bit you are missing - Vanguard will buy back the ETF at a value they calculate based one the underlying shares (minus a small overhead to cover their costs). If the market price of the ETF is undervalued compared to the underlying assets, Vanguard can buy back the ETF shares and make a profit.

  • ihbh on 15/08/2021 - 21:39
    +1

    isn't it really just this one principle "Asset Price Scarcity"

    No. It's due to low interest rates and easy credit (that's driving the stock, property and other asset markets around the world).

  • HeWhoKnows on 15/08/2021 - 21:56
    +2

    Obviously OP has no idea how the share market works nor how index funds work or what they are

    Best OP gets an education in the share market and ways to invest

  • bocca on 15/08/2021 - 23:32
    +2

    Aren't troll posts pyramid schemes?

    The only reason why troll posts rises on average is because people keep pumping it, but should we be doing so?

  • Blue Cat on 15/08/2021 - 23:32
    +2

    I thought you were talking about NFTs, which I was gonna say is a Stupid Tax 2.0, but I have no idea what ETFs are, so can’t contribute.

    I thought I was going crazy seeing all these people defending NFTs lol

  • Tasmaniac on 16/08/2021 - 00:42

    I mean you do have a point. Investment banks are willing to underwrite and sell newly listed shares for whatever they can get.

    You need to remember though that arbitrage and market efficiency work in the opposite direction to correct any overpricing errors.

    Shares are a bit like currency in the sense that they are only worth something because we all agree that they are, that's where the field of behavioral science starts and things get irrational.

  • striker5950 on 16/08/2021 - 00:49
    +4

    I lost brain cells reading this. Op posted with a burner account to avoid getting flamed tho..

    Anyways etf are just a bunch of stocks held under one entity. For example there an EV etf its a bunch of ev stocks combined like tesla lucid etc. instead of buying each share from each company you buy the ev etf share coz its easier and as its already diversified so you mitigate risk this way instead of buying selective ev stocks. Some of the safest ways to play the market are etf. Obviously only invest in well known etf with good performance history and a good team behind them. So educate yourself before posting on here taking sh!t son.

  • gromit on 16/08/2021 - 08:27

    Gotta be a troll or he simply doesn't understand what a ETF is or a pyramid scheme. he is right about one thing though, people don't do their research, Cheer being a prime example of that.

  • Joshman5k on 16/08/2021 - 08:35
    +3

    I get this is probably a troll… But could it be that you are confusing NFTs and EFTs?

  • SuperMid on 16/08/2021 - 09:35

    How is something that measures market performance across multiple industries, anything remotely like a pyramid scheme???

    I think op needs to do some proper research. Btw, index funds have been around for a while now, nothing new.

  • Toffees on 16/08/2021 - 09:45

    Nearly all assets are bought because you hope to sell it to someone else for more in the future

  • Trying2SaveABuck on 16/08/2021 - 09:58

    No they are a bit over hyped atm though

  • Tarnos on 16/08/2021 - 11:04

    I know exactly what you mean, though you have attracted a lot of negative attention because you have used a click-bait title that is fundamentally incorrect - making people doubt your financial understanding.

    If everyone stopped giving advice that ETFs are always winners, would their value be negatively impacted? Yes.

  • funkydan2 on 16/08/2021 - 11:18

    +1 for this episode of NPR's Planet Money 'summer school' on index funds https://www.npr.org/2021/07/29/1022440582/planet-money-summe…

  • drfuzzy on 16/08/2021 - 11:23

    If everyone is pouring money into the same investment vehicle is ceases to have an edge and the real money is made elsewhere.

    • redfox1200 on 16/08/2021 - 12:52

      the real money will be made on commodities

  • dontgooffline on 16/08/2021 - 11:45
    +1

    ETFs are not a pyramid scheme because the price of the ETF moves in sync with the price of the underlying investments. For example the Betashares A200 ETF is a security whose price mirrors the performance of the ASX200. Instead of buying $1 of every single share that constitutes the ASX200, you could just buy $200 of the Betashares A200 ETF and achieve the same thing.

    The ETF price doesn't move up / down based on the number of units of the ETF outstanding unless its an ETF with ridiculously low liquidity (which wouldn't get approval from ASIC / ASX to be listed in the first place).

    • steeevo on 16/08/2021 - 14:06

      Does it though? When I buy units on market for the ETF, I am buying from another individual, not contributing new funds. Unless I am wrong on that, which is possible.

      Assuming I am right, there should be a correlation between the performance of the underlying index and and ETF that seeks to match it, but I don't think it is right to describe it as mirroring the underlying index. The price of the ETF depends on a distinct market. If some news came out today about an issue at betashares, the price of their ETFs on market would likely decline despite no change in the underlying instruments (and I hope that doesn't happen as I own some units in their ETFS!!)

      • lubos on 16/08/2021 - 14:15
        +2

        When I buy units on market for the ETF, I am buying from another individual, not contributing new funds. Unless I am wrong on that, which is possible.

        Yes - you are wrong which means you can sleep well. ETFs are open-ended. Number of units on issue can be increased or decreased in response to demand from investors.

        This ensures the unit price in EFT is roughly the same as underlying securities regardless of investor demand.

        • steeevo on 16/08/2021 - 15:59

          You learn something new every day, I had that wrong!!

          To be clear, if I were to dispose of my etf units in, say, VAS on market (which is the only way I can see to dispose of them) I am not reliant on another buyer purchasing them from me to get value?

          And I when I bought some through commsec this morning, I was contributing funds direct to Vanguard and not actually buying existing units from someone else (as would be the case for shares)?

          • lubos on 16/08/2021 - 16:40

            @steeevo:

            I am not reliant on another buyer purchasing them from me to get value?

            That's correct. When you look at market depth chart for VAS you will see massive orders at both ends of bid/offer. These are actually price points at which VAS will create or destroy units. These price points are based on the value of underlying securities. So you are not reliant on another buyer purchasing from you. VAS will purchase from you if you hit their price. This will destroy units and contract the fund.

            • JelIyfish on 16/08/2021 - 19:04

              @lubos: FYI - they are called market makers and they do just that.
              @steeevo

  • idonotknowwhy on 16/08/2021 - 12:22

    You're being mean to OP lol.
    I don't think it's a troll. 5 years ago, I was asking similar questions online (not pyramid scheme, but if ETFs are in a bubble, what happens if Vanguard goes bankrupt, etc).

    • lubos on 16/08/2021 - 14:18
      +1

      If Vanguard goes bankrupt, someone else will take over their trust accounts or trust accounts will be disolved and you will get underlying securities.

      In other words, if you buy units in Vanguard fund, you directly own those units. Nobody can take them away from you.

      • idonotknowwhy on 16/08/2021 - 16:47

        Yeah I get that now and it feels so obvious now.
        But I was in a similar position as OP at one point.
        "Why does everyone suggest this Vanguard shit, is it a pump n dump scam?" etc.
        I'm glad I didn't ask here lol

  • deneb on 16/08/2021 - 12:29

    Is the stock market inflated? probably?
    Is etf a scheme? How is it pyramid when I have a small piece in every stocks in asx200 and it moves identical to index?
    I think you need to refresh your definition of "etf" and "pyramid scheme"

  • JelIyfish on 16/08/2021 - 12:39
    +1

    ETF's are just an investment vehicle not an investment.
    Learn the difference, cheers!

    • redfox1200 on 16/08/2021 - 12:50
      +1

      you mean like a high yielding $80,000 car?

      • JelIyfish on 16/08/2021 - 15:27
        +5

        I can't even remember a time when that joke was funny.

        • ozbjunkie on 17/08/2021 - 07:37
          +1

          That 25 minute window has become hazy for all of us.

  • netjock on 16/08/2021 - 13:58

    Everywhere you see financial advisors recommending ETFs

    This is where the problem starts. Either you didn't pay enough for an FA to explain to you what it is (or you didn't pay attention) or you didn't pay for an FA and didn't figure out what it is.

  • Arigato on 16/08/2021 - 16:09
    +1

    Yes life is a pyramid scheme

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