ETFs are both a big positive for investors and when they are very narrow (not all that liquid) markets focused a very big negative.
By Alex Mai at 5 July, 2009, 12:01 pm
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One of the things people fail to realize as an investment community is that ETFs like UGA, USO, UNG, etc… HAVE to put new money to work. Even if the fund is about to hit a peak… here is an example.
Oil rallies a lot in 2 weeks.. people start buying USO.. they pour $50 million into USO in a few days as a group.. USO MUST go buy oil futures contracts (the front month no less) to meet this increased fund flow… they then drive prices up even further as the volume surge in a rather ill-liquid market (by stock standards anyways) may be a short term benefit but a long term problem.
This type chasing of performance can really cause issues. In the hedge fund world or the mutual fund world they manager would have a choice to invest that new money right away or wait a few days for a pull back or a whole other range of possibilities.
This “we must buy or we must sell” is a double edge sword many people do not seem to take into consideration when reviewing the impact of these funds on the futures markets and the consumers….
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