The market crash that sent the Dow Jones Industrial Average plummeting by more than 1,000 points within minutes of the opening bell on August 24 has been partially blamed on a SunGard software problem that led to a large number of ETFs temporarily trading at heavy discounts to their net asset values.

However, according to Ben Hunt, chief risk officer at Salient Partners, the real cause of the crash was not a computer glitch, but rather a larger problem with the prevailing ETF trading mentality.

Allocation Versus Investing

In a new note, Hunt discussed the difference between investing and portfolio allocation.

Investing involves buying shares of a stock that represent fractional ownership of a money-generating company. ETFs by definition are funds, which means that they represent an allocation to a particular theme, rather than an actual asset that buyers want to own.

“Like so many things in our modern world, the exchange traded nature of the ETF is a benefit for the few (Market Makers and The Sell Side) that has been sold falsely as a benefit for the many (Investors),” Hunt wrote.

ETF Trading Benefits Wall Street

Hunt pointed out…

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