The index fund is holding the underlying stock, largely. The challenge is that if say 5% of their fund holders sell their shares in the fund, the fund has to sell the underlying stock to generate the cash to pay out. Most funds have a rule in their documents that if you are a large fundholder (holding 1% or more of the fund) and you sell, they can hand you stocks directly rather than selling them and giving you cash, but that doesn't work it it's tens of thousands of small fund holders selling.

So? They sell others buy. If I hear there is a squeeze and have cash I'll throw it in: who wouldn't? It's never the case that x٪ of the market can exit at once regardless of how it is owned.

So? If 5% of all stockholders sell their stock, that's going to cause a downward price movement, too.

What is special about an ETF, that makes this situation any worse?

> What if my index fund is actually just buying and holding the underlying stock as opposed to just a price tracking entity? In that case not taker for my fund = no taker for the underlying stock right? Will this not have the liquidity risk that Bury mentions?

In any crisis, the people who get really screwed are those who decide they have to sell, at any price. Instant liquidity - by whichever route - gets really expensive. An actively managed fund can at least decide which assets to sell to meet redemptions, holding those it thinks are undervalued at the moment. Whereas an index fund is effectively exposed to a crisis anywhere in the market.

They are mostly not doing physical replication (physically owning all the shares) but using synthetic means.

Not really. The most popular index funds physically invest their capital in the stocks making up the index:

https://www.investopedia.com/articles/markets/101415/4-best-...

That wasn't what the Article being critiqued said though.

Correct. There are index mutual funds and index etfs. The article seemed to refer the latter.

Source? In the jurisdictions I'm familiar with, synthetic ETFs come with special warnings (even in the fund name), and they're definitely not the majority.