Questions of the Week – ETFs & microcaps

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Question 1

Hi Paul. ETFs seem to be very popular at the moment for personal investors and SMSFs. My question is: what happens if we have a crash? Looking at the ETFs on the Australian market, there are only a few buyers and sellers. So, if everyone is trying to sell, will I be able to get my money out?

Answer

Exchange Traded Funds (ETFs) appoint market makers to provide tight bid/offer spreads around the underlying NTA (net tangible asset value). If the market makers are net buyers, they redeem the units with the issuer. If they are net sellers, they create units with the issuer. Look at the quality of the spread rather than the number of buyers or sellers. If you are investing in a traditional ETF that tracks a major index such as the S&P/ASX 200 or US S&P500 (rather than a synthetic ETF), yes, you will be able to get your money out.

Question 2

As a first-time buyer of shares, I bought into (Mayne Pharma) when the shares were 73 cents. Not sure whether I should cut my losses or just hold on for the ride?  It's been a bit of a learning curve but at least I know now about setting a stop loss when I buy anything else!

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