The next downturn in markets will highlight the possibility that mutual funds suffer a far greater liquidity crisis than ETFs, according to HANetf founder Hector McNeil.
This is because of the structure of mutual funds along with lack of clarity in pricing, and the gating threat, McNeil suggests.
Rather than worry about ETFs excacerbating any sell-off in a serious market downturn, investors should be concerned about the challenges they may face from the mutual fund product type.
McNeil said: "One only has to look back to events so far this year, or when there was a run on property funds in 2008, to see where the heart of any crisis could manifest itself. There is the common excuse that people will sell ETFs rather than mutual funds because it is easier to do so, but the reality is that there are a number of technical trading mechanisms for ETFs which reduce, rather than exacerbate, potential liquidity issues."
McNeil points to authorised participants/market makers and their role creating and redeeming shares as needed, including intraday aggregation of buying and selling, which he says reduces trading friction for existing shareholders relative to what a mutual fund structure can do.
ETFs are also affected by the relative underlying liquidity of the asset class they are linked to, he says, but the structure itself means that buyers and sellers can get "an accurate picture of the available liquidity in an ETF every day, unlike a mutual fund where this is yet another unknown on top of whatever issues there may be at an asset class level."
ETFs using liquidity screens would only include stocks that meet minimum liquidity measures.
"The Bloomberg implied liquidity function for ETFs is incredibly useful and goes a long way to tackling fears over ETFs ceasing up in times of stress."
"This is in stark contrast to mutual funds, and the question investors should be asking more and more is why they continue to buy and sell a product without knowing the real price they pay for it. Indeed, the mutual fund market is one of the few things in existence where you buy or sell something without knowing the price you will be paying or the money you will be receiving back and you have to sell it back to the person you bought it from."