Friday, June 21, 2013

The ETF Market Kind Of Broke Yesterday

Yesterday's big selloff exposed a weakness in one of Wall Street's darling products, Exchange Traded Funds (ETFs), the FT reports, and no one really saw it coming.

ETFs are a baskets of goods that can be traded like a single asset. They've become really popular on the Street over the last decade to the point where you can buy an ETF of almost anything — gold, kinds of companies, groups of countries (like emerging markets)... the list goes on.  And just like everything else, they got killed yesterday.

The problem wasn't just that ETFs got swept up in the general panic of the moment. It was that as traders sold off and ETFs got cheaper, the discount between the price of the ETF and the assets that made it up widened.  Suddenly, everyone wanted to redeem those underlying assets from banks like Citi and State Street.

Now you can imagine what happened next……..

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