The perils of passive investing: Will ETF plumbing lead to next financial bust?

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The perils of passive investing: Will ETF plumbing lead to next financial bust?

Synopsis

Hedge funds and traders love ETFs due to their liquidity. Hence, there’s more redemption pressure on these instruments during market volatility. However, the liquidity can evaporate exactly at the time when it is required the most, leading everyone to rush for an exit.

Exchange-traded funds (ETFs) have built a reputation for being able to operate through market disruptions. When markets shut in Athens during the Greek debt crisis for example, or in Egypt during the Arab spring, the tracking ETFs continued to trade. Yet, even behind ETFs there are some hidden risks that become apparent only when things go wrong. For many observers, the ETF plumbing (that is, how ETFs work) might prove the next scene for a

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7 mins read, Last Updated:

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