Risks of the ETF in the near future

There are fears that ETFs will be the key contributor to the next financial crisis. ETFs now take up a huge percentage of retail and pension investments. Some suspect that the ETFs will lead the market instead of mirroring it. Lack of liquidity within ETFs may cause rapid selling of ETF units, destabilizing the general stock market.

Another concern is how over-levered some ETFs are. There are also complex ETFs that are leveraged, synthetic and inversed. It is not clear yet that the impact of these instruments on the overall markets when prices become unstable. For far too long, ETFs have been the cool kid on the street. Investors have ignored the voices of some who share the adverse side effects of ETFs. It is well known that the ETF structure is unique, requiring units of ETFs to be created and to be tracked according to the market. The creation and marking to market of the ETF is a constant arbitrage exercise. Not every ETF is liquid and simple. Some ETFs mirror complex markets like junk bonds, loans and less familiar municipal indexes.

Finally, ETFs when leading the market is a representation of herdish behaviour. Afterall, every ETF investor invests in the same market within the same ETF product. For some, they have preferred index funds over ETFs precisely for fear of the ETF structure.