Quote:
Originally Posted by wwkayaker
I don’t have index funds aside from a small chunk of emerging markets. I don’t think your rationale for investing in ETFs at any time is correct. From what I understand, ETFs are priced according to the net asset value of the stocks held within the ETF; overvalued stocks would create overvalued ETFs and undervalued stocks would lead to undervalued ETFs. Am I incorrect?
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That’s definitely the case. ETFs can trade over/above “what they should” based on the value of those underlying holdings. If they trade frequently and there is enough volume it becomes less of a concern. To be clear, there are a lot of factors though. Depending on the ETF structure you don’t actually own those underlying securities and instead own a derivative product based on them, and that adds another layer as well.
It really depends on what you’re buying and it’s not easy enough to create a simple rule. If you’re buying a massive index you’re taking a different approach compared to buying a small, sector specific, or levered product. Literally everything from the rational to the holding period will different here.