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El-Erian Warns Advisers About Over-Promising ETF Liquidity

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Mohamed El-Erian Photographer: Michael Nagle/Bloomberg

Mohamed El-Erian, chief economic adviser at Allianz SE, reiterated his concerns about liquidity in exchange-traded funds.

In front of an audience filled with financial advisers during a keynote address at the “Inside ETFs” conference in Hollywood, Florida, the economist, a Bloomberg View columnist, listed some geopolitical and market risks for 2018. And ETFs didn’t escape the short list.

“Some ETFs, it’s a small proportion, but some of them have inadvertently over-promised liquidity to users,” he said. “The users have assumed much more liquidity than what the underlying asset class can serve.”

El-Erian is talking about the problems that arise as investors move even more money into passive investing products, “some of which venture quite far from highly liquid market segments,” he wrote in a Bloomberg View column last month. Think speculative-grade debt and emerging markets -- where trading volumes may not be as high as more liquid equity markets.

There are now 58 ETFs that track high-yield markets compared with only three funds 10 years ago, according to data compiled by Bloomberg.

El-Erian warned it could get nasty if some of those who use the funds as temporary trading vehicles decide to exit the market en-masse.

“I grew up in a world where liquidity considerations were serious when you were investing in a certain segment of emerging markets, or a certain segment of high yield,” El-Erian said at the conference. “A market accident comes from the significant success of certain things you’ve been talking about for the last two days -- indexing, ETFs.”

— With assistance by Rachel Evans

(Adds number of high-yield ETFs in fifth paragraph.)
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