The May 6 “flash crash” spurred one financial planner to largely swear off exchange-traded funds in client portfolios and return to using traditional mutual funds instead.
The reason is liquidity risk, according to an article in The Wall Street Journal by Shefali Anand. “Sometimes, when there is a lack of buyers and sellers, the price of an ETF can diverge sharply from the value of its underlying investments,” the article says.
“That’s what happened on May 6, when some ETFs lost almost all of their value briefly. One of the adviser’s clients lost more than 20% of his stake in one ETF because of a stop-loss order requiring the fund to be sold if it fell below a certain price. Worried about the possibility of a recurrence, he has been selling clients’ ETFs and buying index mutual funds instead.”
Read the full article here.
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