etf price movements-do they affect the price of the underlying security?

Question

Looking back on the recent volatility spike in equities, I was wondering. Does demand for an equity ETF create a demand for the underlying shares that comprise the ETF, as in program trading in the 80's? Conversely, if a lot of people are selling an equity ETF, does the trust manager then have to sell like quantities of the underlying stocks, like in the crash of 87 with stock index futures? I was wondering if ETF seling bleeding through to the individual shares helped to aggravate the drop of 2/27.

Answer 1

Very good question, but I'd have to say, no, it doesn't.

If there's a disrepency between the ETF and the underlying stocks represented, money usually moves in pretty quickly to neutralize the differences.

For example, if someone wanted to buy a bunch of housing holders, and kept buying and buying and started to push it much higher than the parts, people would start selling the holder and neutralizing their position with some of the underlying stocks or the options. Market makers are pretty good at spotting opportunities. So you may get one or two trades past em, but after a couple, they'll be the first ones in line to get a cut of any opportunity too!

Hope that helps!

Answer 2

Yes, but you can short ETFs and you can't short indexes and mutual funds. Shorting stocks puts downward pressure on stocks during high times and upward movement during low times when they cover.

There were two things going on in 2/27. One was general selling because of the talk of ressession (Greenspan said just that like the day before) and the NYSE had a glitch in which a slow bleed was shown as a 200 point drop in a matter of seconds.