ETF liquidity 'illusion' alarms managers after volatility spike

Fund managers have voiced concerns ETF trading is increasingly driving the direction of the wider market and exacerbating recent slumps, raising questions over the use of the products in less liquid securities.

The spike in volatility seen last month has drawn attention to the increasingly prominent role played by exchange-traded funds in less liquid asset classes such as high yield debt and emerging markets. iShares took the unusual step of issuing an open letter to investors last week, in which it noted the “increased focus on how ETFs perform, particularly in stressed markets”. The provider said ETFs increasingly represent “the true market” in some areas, and noted record levels of daily trading in its US high yield bond and emerging market equity products. But other investors said ETF...