ETFs Sound Investment Vehicles, Not The Center Of Market Volatility

ETFs Sound Investment Vehicles, Not The Center Of Market Volatility

$BLK, $DIA, $SPY, $QQQ

Tuesday, BlackRock Inc.’s (NYSE:BLK) CEO Laurence Fink challenged a rival fund manager who criticized ETF’s (exchange-traded funds) as “not safe,” saying his counterpart at AllianceBernstein should “learn more” about them.

Mr. Fink responded to a NY-T’s interview with AllianceBernstein CEO Peter Kraus to be published Thursday.

ETFs “may have low fees, but they are not safe and your clients need to understand that,” Mr. Kraus said in a quote that AllianceBernstein spokesman verified was accurate.

Mr. Kraus was apparently referring to a bout of market volatility on 24 August that sent a group of ETFs down some 30% from their prior-day close, often far below the value of their underlying stocks. Trading in 327 such funds was halted that day.

“He should learn more about ETFs,” Mr. Fink responded on a panel at the New York Times’ DealBook Conference, when asked about Mr. Kraus’ comments in the upcoming article. “I would not be as hysterical.”

Mr. Fink, whose iShares division manages $1-T in ETFs, said the trading issues on 24 August were temporary and limited, but “a good wake-up call” nonetheless.

The 24 August market dive saw the DJIA plunge at the open, losing more than 1,000 pts during the morning.

It was not the 1st time ETFs were at the center of a market storm. The $2-T industry also was faulted by some for the 6 March 2010, “flash crash.”

Mr. Fink, whose firm manages an industry-leading $822-B  ETF portfolio as part of its total $4.5-T under management, believes the problems were more related to market structure than the products themselves.

Mr. Fink repeated his company’s view that fixing the issues requires a re-examination of a variety of rules and practices, including those governing when and how trading in stocks and ETFs are halted.

“We have taken this as a serious issue,” he said. “Most people … have decided this is a market-structure problem.”

In all, 1,278 market “circuit breakers” were tripped, causing a halt in trading. Mr. Fink said that once trading resumed, the ETFs all returned to normal pricing.

“We look at this as a good wake-up call. We cannot accept that kind of market action,” Mr. Fink said. “I would address how you fix this.”

Notably, ETFs are mostly institutional trading units, and mutual funds are used for the retail participants.

Tuesday the US major market indexes finished at: DJIA +89.39 at 17918.15, NAS 100 +17.98 at 5145.13, S&P 500 +5.74 at 2109.79

Volume: Trade was above average with about 900-M/shares changing hands on the NYSE

• NAS 100 +8.6% YTD
• S&P 500 +2.5% YTD
• DJIA +0.5% YTD
• Russell 2000 -1.1% YTD

Stay tuned…

HeffX-LTN

Paul Ebeling

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