Investors in exchange traded funds (ETFs) should be aware they do not solve the problem of liquidity in a market crisis, according to the co-chief executive of HanETF.
Speaking at a Lipper conference in London today (November 8), Hector McNeil said many market participants in the ETF market believed they could provide liquidity beyond the liquidity of the underlying assets.
Mr McNeil, who is the former chief executive of Wisdom Tree in Europe, said many in the ETF industry believed the use of market makers meant liquidity could be maintained in times of stress.
But he said: "This is similar to what the big hedge funds thought about products such as collateralised debt obligations and other products before the financial crisis, and that was wrong.
"The reality is all collective investments are always only as liquid as the underlying holdings. That applies to ETFs as much as any other investment, and it is a case of buyer beware with ETFs as it is with other products."
David Scott, an adviser at Andrews Gywnne in Leeds, said in a market crisis he would expect it to become hard for ETF investors to sell because demand had been driven by short-term investors who would be among the biggest and fastest sellers, creating a liquidity problem.
Andrew Walsh, head of passive investment sales for Europe at UBS, said ETFs were once treated as a "cancer" by the market and the regulators had "the pitchforks" out for the products, but this prompted greater transparency in the market.
david.thorpe@ft.com
