COULD the hottest trend in investment management be the greatest danger to financial stability? Exchange-traded funds (ETFs)—pooled portfolios of assets that trade on stockmarkets, usually linked to an index—have grown from a total value of $416 billion in 2005 to $2.5 trillion today. Their rapid growth has left regulators worrying about what might happen if the money that has flowed into ETFs decides to flow out again.Investors can sell their holdings in ETFs throughout the day, but the assets of some ETFs may be hard to sell immediately. One obvious area is the corporate-bond market, where banks have retreated from trading, and so hold less inventory. There are some 46,000 separate bond issues, not all of which will find ready buyers during a rout.In other words, there is a potential mismatch between the liquidity of the funds and the liquidity of the assets they own. A stampede out of ETFs might cause a fire sale of assets that would ripple through the financial system. Defenders of the industry, however, say these concerns are overstated; after all, it weathered the sell-off in equities and corporate bonds in 2008-09.To understand ETFs fully...
from The Economist: Finance and economics http://www.economist.com/news/finance-and-economics/21627717-regulators-are-worried-trendy-new-product-will-sow-instability-emerging?fsrc=rss|fec
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