A mutual fund is just a portfolio of stocks (or other assets) and hence the fund performs as well as its holdings [minus various fees]. However, an exchange traded fund (ETF) performs, like a stock, based on trades. I assume that means if everyone started selling an ETF at the same time, even if the stock prices for the positions in that ETF were increasing, the price of the ETF would plummet. In theory, can an ETF decline while its investments are doing very well? If not, what prevents this from happening?
Here is a silly toy example. Say an ETF currently owns one share each of stock 1 worth $20 and stock 2 worth $30. And lets say the ETF is made up of two shares that are each worth $25.
What happens if the owners of each of those $25 shares wants to sell them and is willing to take a price of $1 per share if need be, regardless of the fact that the holdings of the ETF are far more valuable.
And let's say in addition, the max a buyer is willing to pay is also $1.
Are ETFs not like stocks?
Would the price of this hypothetical ETF not plummet to $1?