If you’ve accumulated a large, concentrated stock position, perhaps from an IPO, acquisition, or years of stock-based compensation, you’ve likely faced the challenge of diversification.
Correct me if I'm wrong, but another problem with exchange funds could be the portfolio assets one exchanges into...for example, exchanging NVDA stock with a low cost basis may not make sense if the "diversifiers" in the exchange fund are all stocks like YELP, Pets.com, etc. And I would guess there is no real way of knowing what you're exchanging for before the fact. Correct.
Specifically, isn't the exchange fund user making a bet that the future performance of the diversifying assets in the fund will not significantly under-perform the asset added to the fund?
It's a great question, Brian, and people should absolutely ask the fund manager about it!
If the fund is concentrated in one sector (say, tech), it's still better than holding a single stock because it reduces idiosyncratic risk. That said, it might still not provide enough diversification for some investors. I agree!
Hi all,
Correct me if I'm wrong, but another problem with exchange funds could be the portfolio assets one exchanges into...for example, exchanging NVDA stock with a low cost basis may not make sense if the "diversifiers" in the exchange fund are all stocks like YELP, Pets.com, etc. And I would guess there is no real way of knowing what you're exchanging for before the fact. Correct.
Specifically, isn't the exchange fund user making a bet that the future performance of the diversifying assets in the fund will not significantly under-perform the asset added to the fund?
Brian
It's a great question, Brian, and people should absolutely ask the fund manager about it!
If the fund is concentrated in one sector (say, tech), it's still better than holding a single stock because it reduces idiosyncratic risk. That said, it might still not provide enough diversification for some investors. I agree!