The $2.2 trillion exchange traded fund industry has been slowly eating away at the mutual fund industry’s market share. While the relatively new investment vehicle is making inroads into the financial industry, there are still many detractors censuring the products.
Peter S. Kraus, chief executive of AllianceBernstein, has issued a warning on ETFs that have captured the attention of many investors and financial advisors, reports Landon Thomas Jr. for the New York Times.
“Let me bring it down to reality,” Kraus told the NYT. “You guys woke up one morning in August and the Dow was down 1,090 points. And on that day a $40 billion ETF traded at a 30 percent discount. That should never happen, and if your client traded on that day, you will never get that back. Never. These funds may have low fees but they are not safe, and your clients need to understand that.”
Kraus touches on misgivings that many in the financial industry have expressed. For instance, critics like Stanley Fischer, vice chairman at the Federal Reserve, and investors like Carl C. Icahn and Howard Marks have cautioned that heavy selling pressure on ETFs covering more hard-to-reach areas could experience liquidity issues during times of heightened volatility.
However, the ETF industry has countered that the ETF products are working as intended and that the real problem involves the market structure.
“We didn’t have the problem — this was a market structure problem,” Laurence D. Fink, the chief executive of BlackRock, said. “Aug. 24 was a big event, but 90 minutes later everything was fine.”
Specifically, BlackRock has already come out with a research paper that revealed the sharp price drops on August 24 were a result of panic selling and lack of trading information, which dissuaded market makers from jumping in to support prices as buyers. [The ETF ‘Mini Flash Crash’ Examined]
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.