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What will happen if there is a massive sell off in the SPY ETF?

Will this affect the stock prices of its components? For example, will the price of Apple (APPL) shares drop? Or will it only affect the prices of smaller cap stocks in this ETF?

My general question is whether the selling of ETFs affects the price of its component stocks?

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  • Why are you selling spies? Doesn't this belong in politics or somewhere? (IOW, please explain your acronyms.) – jamesqf Dec 13 '20 at 18:15
  • @jamesqf , I'm with you that it is hateful when people use random abbreviations. However, the only name for a SPY is a SPY, it's not really an abbreviation. And I think it's not unreasonable that when mentioning one of the world's, what, top 10, financial investing instruments, in the personal finance site, one does not have to say "that's an ETF if you didn't know". There could be a danger of pedantism - maybe ! – Fattie Dec 13 '20 at 20:26
  • @Fattie: So what IS a SPY, then? Doesn't help to say it's something to do with exchange traded funds, because I have never really understood the point of those. I mean, why not just invest directly in mutual funds? (And I'm not real happy about people who refer to random mutual funds or stocks by their 3-4 letter codes, like I'm supposed to care enough to have memorized them all?) – jamesqf Dec 13 '20 at 20:45
  • "like I'm supposed to care enough to have memorized them all" your point is not unreasonable, indeed as you can see I slam folks who use random little-known abbreviations on the site! I edited the Q anyway – Fattie Dec 13 '20 at 20:57
  • @jamesqf "like I'm supposed to care enough to have memorized them all?" I don't know about the other web browsers, but Chromium allows you to highlight a word or phrase, right click and then choose "Search Google for "selected text"". It's stupendously handy.. – RonJohn Dec 13 '20 at 21:11
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ETFs (Exchange Traded Funds) are "amalgams" of stocks. (That what funds are.)

Therefore, if you sell shares of an ETF, you're effectively selling the stocks which belong to the ETF.

SPY is an ETF containing all 500 stocks in the S&P 500 Index. Thus, if loads of people who own SPY suddenly decide to sell their shares, the individual stocks would also be sold. That would put downward pressure on the stocks which make up the S&P500.

AAPL is part of the S&P, and so would also fall.

What you didn't mention is that there are many other funds which mirror the S&P500. Examples are:

  • VOO
  • IVV
  • FXAIX
  • SWPPX
  • VFINX
  • SVSPX

Some of those funds are Really, Ginormously Huge. Since you only mentioned SPY and not any of the others, I'm dubious as to how much impact there would be.

There would be some panic selling by others ("What do all these other sellers know that I don't know? Better sell!!"), but there would also be some bargain buying by others ("The fundamentals are good, so let me scoop up more at a bargain.)

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  • One could imagine situations where a particular fund might be sold, e.g. Madoff Investments, without necessarily affecting the value of the underlying stocks that were supposed to have been owned by the fund. – jamesqf Dec 13 '20 at 20:52
  • @jamesqf in that case, were the Madoff investments just dumped on the open markets, or did the Feds transfer management of the assets to another company (like what the FDIC does with failing banks)? – RonJohn Dec 13 '20 at 21:07
  • I was thinking of a case where (at least some) people figure out that it's a scam before the Feds do. – jamesqf Dec 14 '20 at 3:22
  • @jamesqf how large were the Madoff holdings compared to the size of the whole market? Just as importantly, were there actually any real investments, or was it a giant Ponzi scheme? – RonJohn Dec 14 '20 at 3:47
  • @RonJohn - When you sell an ETF, you are doing just that, selling ETF shares. While the NAV of the ETF is based on the values of the component shares, you are not selling those component shares. They usually drop as well but they do not necessarily have to sell off as well or sell off as much. If the NAV diverges too much, the Authorized Participant would step in correctively. However, it is quite possible that an SPY component such as AAPL could rise in price while the SPY sells off. – Bob Baerker Dec 17 '20 at 14:26
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Massive selling of the SPY does not happen in isolation, meaning that its component stocks will be relatively unchanged if the SPY drops like a rock.

If an ETF strays from the NAV of its components, the Creation and Redemption mechanism is an arbitrage that drives prices back in line.

If the ETF drops and the NAV is trading at a premium to the ETF, the Authorized participant will buy ETF shares and sell the underlying shares.

Other market participants can arbitrage the difference as well though it's outside the Creation and Redemption process.

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