How is it possible that millions and millions of people around the world buy millions and millions of shares every day through ETF savings plans? At some point, everything should be bought up. Theoretically, there should have been no more shares in one share or another long ago, or you would have to wait for sales before new purchases are possible.
It really does seem as if investors are buying real shares every day through ETF savings plans. But does that really happen in reality?
What really happens with an ETF savings plan:
For example, if I invest €100 in the $VWRL (+0.05%) I don't actually buy every single share in the index 🤯
Only the corresponding fund units are booked into my custody account.
It is only at the fund level that it must be ensured that the ETF replicates what it promises.
How do ETFs actually invest?
There are two main types of ETFs that everyone is probably familiar with: physically replicating and synthetically replicating.
I will leave the synthetic ones out, as the "manipulation" is obvious here. 🪤
Physically replicating ETFs actually buy (directly or partially) the shares in the index. However, this is done in bundles in large transactions and not for each individual savings plan.
ETF issuers often trade via APs (authorized participants), which are major banks or market makers. These create or destroy ETF shares in huge blocks.
When demand increases, the AP delivers shares to the fund, receives ETF shares in return and sells them on the market. If more shares are sold, the process is reversed.
Why doesn't the market theoretically become "empty"?
Shares are tradable. There are always buyers and sellers. The price is the key.
If no one wants to sell, the price rises until someone is willing to sell.
Can we conclude from this that hard-nosed and blunt buy and hold could destroy the market? I think so 🙊
Aren't all these blind purchases causing exaggerated price rises?
Absolutely, but that would go beyond the scope of this article.
