The risk with ETF index funds is when the market truly deteriorates ETF's can simply fall apart. Particularly in illiquid or quickly falling markets.
There was a paper about this a year or two ago which I'm unable to find now. I'd caution risk for anyone planning on using ETF's to ride out a storm.
EDIT: I'll have to see if I can find the paper again. The basic summary was that in situations like 2008 ETF's failed in ways that were materially worse than holding the same basket of assets.
But this is not investment advice. Make up your own mind and plan according to your risk tolerances.
Almost every investment deteriorates when the market does. In terms of stability and long term gains, ETFs are the best bet. You have to be willing to take high risk if you want to invest in things that are not affected by market deterioration, and many people don't have the ability to take that risk. Overall, anyone reading these comments, please take all investing advice as a grain of salt.
I don't recall many ETFs failing in material ways in 2008 - I do agree with your view on exercising caution with ETFs. There are 5 different ETF legal structures and they each provide different investor protections. Few retail investors who buy ETFs know (or care) about the differences - but in times of stress they could make a difference.
A crude oil contango occurred again in January 2009, with arbitrageurs storing millions of barrels in tankers to profit from the contango (see oil-storage trade). But by the summer, that price curve had flattened considerably. The contango exhibited in Crude Oil in 2009 explains the discrepancy between the headline spot price increase (bottoming at $35 and topping $80 in the year) and the various tradeable instruments for Crude Oil (such as rolled contracts or longer-dated futures contracts) showing a much lower price increase.[10] The USO ETF also failed to replicate Crude Oil's spot price performance.
Somewhat related is this memo by Howard Marks that talks about the liquidity of ETFs (starts on page 6 -- the whole thing is a great read). When the market sharply drops and there is no liquidity for sellers, it might be even worse for holders of ETFs as they will have even less liquidity than the sellers of the underlying stock.
are you talking about gapping to a discount? market makers can exchange baskets of securities for shares and vice versa, so over any significant period of time, that shouldn't be a risk.
There was a paper about this a year or two ago which I'm unable to find now. I'd caution risk for anyone planning on using ETF's to ride out a storm.
EDIT: I'll have to see if I can find the paper again. The basic summary was that in situations like 2008 ETF's failed in ways that were materially worse than holding the same basket of assets.
But this is not investment advice. Make up your own mind and plan according to your risk tolerances.