Liquid Alts: IMF Warns About ETF Liquidation

Could it be the great bust of passive investing?

The IMF warned Wednesday that regulators and authorities need to start watching asset managers and ETFs over the threat that they could start liquidating assets. The IMF wrote this in a blog post on Wednesday.

ETFs have taken a beating during the ongoing market rout fueled by corporate debt, coronavirus, and plunging energy prices. The three major stock indices in the U.S. moved into bear market territory thanks to 20% drops from all-time highs during the fourth quarter.

IMF Warns on Passive Investing

The IMF’s Tobias Adrian wrote that we should “be alert to possible financial stability threats from outside the banking system. This requires an increased focus on asset managers and exchange-traded funds, where investors might liquidate risky investments suddenly.”

He also noted that big swings in prices might pressure the markets and institutions in new ways.

“While market functioning has been able to withstand large swings in asset prices so far, anecdotal evidence suggests that liquidity has been tightening in many markets,” he wrote. “And there are strains in U.S. dollar funding markets, where non-U.S. banks and corporates borrow in U.S. dollars.”

Looking ahead, investors should make sure that they pay very close attention to what they are buying. The longer that this selloff continues, the greater the possibility that you as an investor might discover that your ETFs are no longer liquid.

Recent: Liquid Alternatives: In 2019, Globally, and especially in Europe, ETFs Raked It In

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