Hacker News Reader

One big factor in the success of these ETFs is automation (aka HFT). You don't get SPY quoted in size at a penny spread without the massive investments in research and technology on the part of the ETF market makers.

View on HN

Isn't the big allure of ETFs that you buy and hold for long time periods betting on the market rather than individual stocks and prices?

The value of the ETFs closely follow the value of the indices or securities that the fund was designed to track. It is therefore very important for the two securities to be as synchronized as possible, which is where (some forms of) HFT comes in.

Makes sense! You need to minimize tracking error on the underlying basket of assets, and the faster you are the less error you have.

emcq is sort-of right, that for buy-and-hold investors a small tracking error is OK, as long as it does not accumulate over time.

But once you have the nice deposit/receipt system set up to incentivise people to trade the tracking error away with arbitrage, you get a smaller and smaller tracking error for free.

It is not obvious to me that the error would not accumulate. In fact, the opposite becomes somewhat clear if one looks at similar products that differ mainly in their lack of an arbitrage mechanism.

Reply on news.ycombinator.com