If SPY Falls, Will Anyone Hear It?

When I got back from the gym yesterday there was a comment on the blog asking for my take on the out of range prints on the S&P 500 SPDR (SPY) at the close. You can go to ETF Central for what looks to me to be good recap with plenty of updates. The very short version is that there were prints at the close with a $106 handle while the real price had a $118 handle. Per ETF Central the bogus prints were to be canceled.

Some immediately thought uh-oh another flash crash. Um, not quite. Earlier in my career I was an institutional equity trader for quite a few years and while things have evolved since then this sort of thing, our of range prints as a one-off, are not that uncommon and not particularly important in the grand scheme of things.

While there are never any guarantees, out of range prints for individual stocks or ETFs, once realized, are corrected one way or another. The Flash Crash from last May was much more of an all encompassing event effecting countless stocks and funds. As far as know this was simply a mistake of some sort that looks like will be corrected (repeated for emphasis).

Someone left a related comment about needing to use limit orders, even for SPY. My reply to this is that limit orders are a good idea more often than not but I don't believe that a mistake that then gets corrected affects the argument. I think limit orders are a good idea but no more so than I did before I found out about this event.

For anyone who takes this to believe that ETFs are bad and the market manipulated I would say, in a similar fashion as above, ETF are no better or worse than they were yesterday before the close and the market is no more or less manipulated than it was before the close.

Anyone who thinks ETFs are bad probably came to that conclusion awhile ago and hopefully did so for better reasons than a hiccup like yesterday. We talked about the overall market being manipulated last week so no need to rehash that so soon.

I've been saying the same thing for years about ETFs; they are just tools at our disposal. For some segments we wish to capture they will be the best way to go and for other segments they won't. They are not perfect, obviously, but for certain segments or certain people or certain fill in any other variable important to you they will be the best tool.

If Egypt turns out to be the best performing equity market in a given year then a plain vanilla (meaning it just owns the stocks) Egypt ETF will capture the effect even if not every last basis point. If Egypt was to be up 80% one year and the Market Vectors Egypt ETF (EGPT) was up 75% would you feel like you had captured it? What about 70%? While I do not know how EGPT would do if the index in Egypt was up that much I think the point is clear. If the possibility of not capturing every basis point is unacceptable to you then you should not buy the ETF--you need to figure something else out.

You must draw your own conclusion but my beliefs about the importance of sector selection and avoidance and country selection and avoidance leads me to conclude that ETFs, flaws and all, are a useful tool but to repeat from countless other disclosures we use more individual stocks than we do ETFs.