The mystery of the reason why ETFs were such a large proportion of the stock market free-fall on Thursday May 6, 2010 should come as no surprise to readers of this site. In 2009, we published a series of articles on ETF investments that didn’t paint a favorable picture.
“The blowback from something like this is on par with the unwinding of a derivative contract gone bad.”
“As I hinted at before, ETFs pose a tremendous risk to the stock market and the portfolios of the respective ETF will be remembered for the fact that due to a liquidity drain all the stocks held will collapse regardless of value. With little cash on hand and an "automated" form of management there will be a crash on the most liquid stocks because the relatively illiquid stocks won't be able register a bid.”
“In their zeal to create hedging and leveraging opportunities to the retail investors, leveraged ETF distributors didn't emphasis enough the fact that the risk of loss was far beyond known market risk. Unfortunately, like the FIRREA rule change we could see painful unintended consequences.”
Disclosure: No Positions