Violent downturns could test new ETF strategies, warns MFS Investment

The exchange-traded fund (ETF) industry is experiencing new innovations that could potentially impact investors, especially during extreme market conditions. Jamie Harrison, head of ETF capital markets at MFS Investment Management, warns that ETFs involved in complex derivatives and less transparent markets may face challenges during violent downturns. As volatility increases, Harrison advises investors to be proactive and vigilant in monitoring these ETFs to avoid potential issues related to lack of transparency.

MFS Investment Management, a reputable firm established in 1924 and known for inventing the open-end mutual fund, emphasizes the importance of conducting thorough due diligence on ETF portfolios. Harrison stresses the significance of partnering with firms that have a deep bench of subject matter experts and strong relationships with liquidity providers to navigate through market uncertainties effectively.

One of the key concerns raised by Harrison is liquidity, particularly during steep market sell-offs. He highlights the importance of understanding how liquidity facilities work within ETFs, especially in times of a significant drawdown. Investors are encouraged to ask tough questions about the ability to enter and exit ETF positions at prices closely aligned with the net asset value.

Christian Magoon, CEO of Amplify ETFs, shares similar concerns about the potential risks associated with newer ETF strategies, particularly those involving private credit and equity-linked notes. Magoon warns investors to closely examine the liquidity standards and trading practices of ETFs holding private credit assets, as well as the credit risk associated with equity-linked notes during market stress.

As the ETF industry continues to evolve rapidly, investors are urged to stay informed and engage actively with their ETF issuers to mitigate risks and make informed investment decisions. By being proactive and conducting thorough research, investors can navigate through market uncertainties and protect their investment portfolios effectively.

In conclusion, the ETF industry’s ongoing innovation presents both opportunities and challenges for investors. By staying vigilant, conducting due diligence, and seeking guidance from experienced professionals, investors can navigate through market uncertainties and make informed decisions to safeguard their investments.