The area of most concern? Fixed income in non-liquid markets such as high-yield bonds is an area of caution not because of the product itself, rather, for the way investors are using them, reports Jason Kephart for Investment News. In a high-yield market, returns are driven by investor money coming in or out. If there are large inflows, the fund is doing well.
However, when there are large outflows, the ETF can be forced to sell to meet the redemptions, and fund managers are left trying to sell into an illiquid market. Fuss says that this is what creates price discrepancies and big losses.
In closing, Fuss is not bullish on the fixed-income market, for ETFs and otherwise. Rather, Fuss prefers emerging and developed foreign markets with good interest rates and healthy currencies.
Tisha Guerrero contributed to this article.