ETFs Could Cause A Liquidity Crisis And The Next Market Crash

Analysts argue these days about the massive selling of ETFs. They speculate that this trend might cause yet another market crash. Investors tend to panic when this happens, as this can cause a liquidity crisis.

Massive ETFs Sellout

During the past decade, passive investing become a sort of trend. According to ETFGI, near the end of April 2019, there was $5.4 trillion invested in ETFs and ETNs. Looking at the last 10 years, we see a compound an incremental increase of 27.1% at an annual rate. Judging by this data, we can see that investors access to stock and bond markets quite differently.

Critics say that ETFs are growing faster than ever. This growing scale could pose a risk for the market in terms of function and especially liquidity. ETFs require the involvement of authorized participants such as trading firms and investment banks, which is where the problem lies.

ETFs Respond to the Market – Not Vice Versa

There are analysts that are on the completely different side of the spectrum. They believe that the risk posed by ETFs is simply unjustified and that there’s no reason for worry. As said, ETFs respond to the market and the other way around isn’t possible. ETFs are here to capture the performance of the market or a certain market segment. As such, they can’t determine the thing that they’re designed to reflect.

Head of EMEA ETF capital markets, Jason Xavier thinks that this there’s a serious lack of understanding of how ETFs work. He says that there are many huge institutions as clients that use ETFs. They also invest large sums of money and they have special departments that look at risk and liquidity. Xavier adds that all these institutions know how the product works.

All in all, there isn’t a single company that had a serious problem with ETFs, as Xavier says.


Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.