A article from the Journal on how the big institutions are learning to game the ETFs.

 

The article starts out sounding alarmist, but ends up in a low-key, nothing to worry about tone.  The big guys are there providing liquidity and that is good for all of us, right.

 

I dunno. They mention two high-yield bond ETFs (JNK and HYG) where the big guys bought the underlying securities from the ETFs  in exchange for ETF shares. Sounds reasonable enough. A dollar for dollar swap. Supposedly, this type of transaction prevents market disruptions. And is good for individual investors.

 

Lets think about this. If the big guys tried to buy illiquid high yield bonds in the open market, they'd likely increase in price. So your ETF price would go up. I always pay more on a purchase from my friendly bond dealer when I try to buy. And sell? Hair-cut please.

 

So what is really happening is the big guys got their bonds for a lower price than if an open-market purchase had occurred.  And the little guys are picking up the tab through the bond mis-pricing in the  ETF: effectively the ETF's bond sale was at a discount.

 

(Same concerns apply to putting bonds to an ETF in exchange for shares.)

 

But maybe I'm too cynical. Or maybe its too late. I don't think Wall Street would take advantage of me.

 

Just my opinion.

 

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Will Big Institutions Up end the Little Guy?

The ETF industry's push to attract large asset managers and pension funds could backfire if small investors think they'll get hurt. A $779 million junk-bond trade raises questions