The Contrarian

“In the investment markets, what everyone knows is usually not worth knowing.”

Are ETFs Safe?

The NYSE halted trading on various occasions lately. The most notable one was on July 8, 2015 and then on August 24, 2015 after the China crash. The latter was in part discussed above.

CNN Money wrote:  “The selling on Wall Street was so dramatic Monday (Aug. 24) that it triggered unprecedented emergency freezes on stocks. Stocks and exchange-traded funds were automatically halted more than 1,200 times, according to Nasdaq.”

Some big ETFs declined 30%-43% early that day. Interestingly, none of their holdings declined nearly that much. One ETF said that the biggest drop in one of its stocks was 11.3%.  Articles call this “mysterious.” We call it a scam.

Of course, those who did not sell at those ridiculous prices still had the market losses for that day, but not the loss of the early morning ETF price. By the end of the day, prices of the ETFs were back in line.

We always want to avoid as much risk as possible, even when there is a low probability of such an event. In late 2007, we started advising that our clients avoid money market funds (MMFs) that invested in the usual CD’s, commercial paper, etc. We recommended “Treasury-only” MMFs. The following year, in 2008, the viability of several large MMFs was questioned, and the government had to issue a guarantee for MMFs to prevent huge outflows that could have created a financial panic.

The Treasury-only funds were safe.

Fast forward to now: The SEC has implemented new rules on money market funds allowing them to stop redemptions, for a period of 10 days.

According to Phoenix Capital, the regulation is called “Rules Provide Structural and Operational Reform to Address Run Risks in Money Market Funds.”

Redemption Gates – Under the rules, if a money market fund’s level of weekly liquid assets falls below 30 percent, a money market fund’s board could in its discretion temporarily suspend redemptions (gate).  To impose a gate, the board of directors would find that imposing a gate is in the money market fund’s best interests.

A money market fund that imposes a gate would be required to lift that gate within 10 business days, although the board of directors could determine to lift the gate earlier.  Money market funds would not be able to impose a gate for more than 10 business days in any 90-day period…

Government Money Market Funds – Government money market funds would not be subject to the new fees and gates provisions.  However, under the proposed rules, these funds could voluntarily opt into them, if previously disclosed to investors.

Here you see that once again it would be prudent to shift your money from ordinary MMFs to “Treasury-only” MMFs. (You can do your own search on google, yahoo finance, marketwatch.com, etc. There are too many to mention here.)