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Effect of savings plans

Personal Finance & Money Asked on April 14, 2021

Putting it very simple, the price for a stock is mostly affected by the demand. There are other factors in play as well, but let’s assume for this question it was actually that simple.

For ETFs, there is a mechanism called savings plan. At the start of every month, thousands of people automatically make a small investment into an ETF, thus increasing the demand (significantly?). Does this also affect the value of said ETF? I could think of one reason why this may not be the case, but I really don’t know: It does not affect the price because the ETF resembles something else, e.g. through replication, and these values are not affected by the demand for the ETF. This also implies that an ETF is not affected by demand for the ETF itself, but only for the underlying values it tries to represent.

Is this intuition right? Or is it actually smart not to buy at the beginning of every month, because demand does indeed change the value of an ETF?

One Answer

Putting it very simple, the price for a stock is mostly affected by the demand.

Actually no. The price is determined by supply and demand. So a high demand is no issue as long as supply is also high.

For ETFs, there is a mechanism called savings plan. At the start of every month, thousands of people automatically make a small investment into an ETF, thus increasing the demand (significantly?).

First, this does not need to be at the start of the month. One of my brokers is executing plans on 1./15. while the other is executing them on 2./16. of each month. Also not everybody has a monthly plan, people may also have quarterly plans or twice a month. So demand is already smoothed a bit.

However, all of this is not really relevant because of arbitrage. Let us assume that there actually is a spike in demand on the first trading day of each month that increases prices. This offers the opportunity for some participants to buy those ETFs one trading day earlier and sell them at a sure profit, right? Unfortunately no, because someone else might just jump the gun and buy these two days ahead. A basic rule of efficient markets is that if there is a guarantee that prices will rise in the near future, they will rise immediately because somebody will take the chance.

Correct answer by Manziel on April 14, 2021

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