Fund managers have voiced concerns ETF trading is increasingly driving the direction of the wider market and exacerbating recent slumps, raising questions over the use of the products in less liquid securities.
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However, Kevin Doran (pictured), senior fund manager at Brown Shipley, drew parallels with the property funds that were forced to close at the height of the financial crisis.
“ETFs give the illusion of liquidity for a less liquid product. They can be compared to some property funds that were forced to close in 2008-9. We are seeing similar liquidity problems in the bond market, though it is more liquid than property.”
Concerns over the widening gap between some exchange-traded vehicles’ share prices and the price of their underlying assets extended to other asset classes, including emerging market equities.
“The past few weeks have highlighted an underlying trend that merits broader public appreciation. More and more ETFs are becoming the true market, particularly when market sentiment shifts fast,” Mark Wiedman, global head of iShares said in a statement.
Deborah Fuhr, partner and co-founder at ETF consultancy firm ETFGI, said the widening discounts observed in some emerging market products were in part due to inappropriate pricing.
“If you are pricing [ETFs] every few seconds, you are not going to see much activity in cases where those markets are really closed. You have to be careful the markets are really open when you see these discounts appearing.”
Fuhr added European regulations which do not require ETF trades to be reported are causing confusion over liquidity levels in some cases.
“Under MIFID rules, ETF trades are not required to bereported, so it looks as though they are not very liquid. There is an issue in Europe about these trades not being reported,” she said.
This article was first published by InvestmentWeek