http://www.zerohedge.com/news/2016-02-05/madoff-airs-tv-two-..."some Exchange Traded Funds (ETFs) that trade on U.S. stock exchanges and are sold to a gullible public, may be little more than toxic waste dumped there by Wall Street firms eager to rid themselves of illiquid securities."Buyer Beware!
It would seem that the market makers are the ones that need some deregulation. The SEC doesn't seem to have a handle on things as usual.CheersVern
I may be naïve, but I would hope this would not apply to the companies specializing, such as ishares, Fidelity, Powershares, Barclays. Also, check their holdings.
One would hope that investors are well aware of this phenomenon. Selling losing investments or out of favor shares can be a problem for funds, who usually own so much they must sell to other pros (as selling on the open market can take a long time or have a major impact on share values). Sometimes there are funds that will accept out of favor investments as part of their strategy. Value investors in equities. What do you call them in bond funds? Junk bonds.The fund should be accurate in the quality of investments listed in the prospectus. If not, I would think you could easily sue them. So the message is read the prospectus carefully before you decide to invest.As to fund families, think again. To unload unpopular positions it is easy to operate an orphan fund within the family that will buy anything. This is a technique to improve the performance of their well known and closely watched portfolios. Investors probably want to avoid these orphan funds, but you can bet the salesmen have clever sales pitches to sell their share--with great prospects to rebound in the near future.
Trying to follow this. I've been following the larger ETFs (QQQ and VTI)... is this just calling out the risk that the ETF could divest itself and shut down shop, if there isnt enough interest?
I don't think the "toxic waste dump" concept applies to funds like QQQ and VTI which have well defined portfolios and buy and sell both winners and losers in response to investor buy/sell decisions.Similarly, market volatility probably causes many ordinary investors to sell and hold cash reducing outstanding shares, but well established popular funds are not likely to fold.Sure smaller ones could end up disappearing if outstanding share numbers fall to critical levels. But usually they fold by merging with other similar funds.
If interested, today's WSJ (Monday) has a section in the back "Investing in Funds and ETFs." Page R10 article "SEC Asks: How are ETFs Hurt by Illiquid Bonds" I haven't read any of it yet. Nice day to be outside.
This must depend on what you mean by "illiquid." If its a company on the verge of bankruptcy, the bond may be nearly worthless, but people know how to price such a bond, and it is probably liquid enough.If its an obscure bond but rated by bond agencies, its probably not a problem.But private placement bonds that are not rated can be a problem. Buyer wants an audit as part of due diligence. If its a valid asset, it has value but sales will not come quickly. They might take months to close a deal. Or firesale pricing. And that means a cash crunch if sellers of the ETF shares want their money.But then think abt the bond issued by a small island govt no one has heard of in a currency of uncertain value. Why would you load up a fund with such bonds. Lets you advertise nice yield while they are paying.Quality funds may have a portion of their assets in such holdings, but it should not be a lot. And if its a lot, prospectus should show that. And you should catch that in due diligence before you buy.
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