Some analysts criticize ETFs that invest in certain kinds of assets. They point out that the ETFs have more daily trading volume than the underlying assets they buy, or at least trade a substantial percentage of that underlying volume. What happens, then, when a lot of investors want to sell the ETFs and few want to buy. This article discusses such scenarios in some detail. It’s worth reading by anyone who invests in ETFs that own lightly-traded assets.
The lesson here for investors is one I repeat so often I’m thinking of getting a tattoo: Know what you own and why you own it.
If you’re buying into a volatile, illiquid corner of the market, you should be prepared for how your investment will react to new information. The fact that you can get in and out through a highly liquid ETF is a convenience, but it’s not a panacea that makes risk go away—it just makes the process of engaging and disengaging that risk easier.