Question

What are the inherent problems of illiquidity in emerging markets?

Answer 1

The post-crisis policy response was designed to create a global hunt for yield and that, by definition, sent investors scurrying into corners of the market they might not otherwise have ventured into. Easy access to those markets via ETFs that promise intraday liquidity to retail investors against an underlying pool of inherently illiquid assets creates a rather precarious setup.

To be clear, nothing says this necessarily has to “snap” (as it were). It all depends on how acute a prospective stress event is. My only point is that in a fire sale scenario, there is nothing “magical” about the structure of ETFs that makes them immune.