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Bond ETFs – A Building Chorus of Investment Professionals Forecast a Potential Brewing Crisis for Individual Investors

On July 17, 2015, The Wall Street Journal reported on a growing number of investors who are concerned as to whether a crisis is brewing in the expanding world of exchange-traded bond funds. (“Carl Icahn Fuels Criticism of Bond ETFs”)

Bond ETFs have emerged as one of Wall Street’s most lucrative niches in recent years, promising buyers the steady income of bonds in a package that is as easy to trade as stocks. Now, a building chorus of investors – including activist investor Carl Icahn – is warning that this best-of-all-worlds pitch may be a mirage. They argue that troubles could arise if the bond market has a sharp showdown, perhaps due to higher interest rates, and investors in ETFs start heading for the exits.

At a hedge-fund conference in New York on July 15th, Mr. Icahn is reported to have said that “some ETFs have bought so many riskier and infrequently traded bonds that it isn’t clear who will buy them, or at what price, should the funds be forced to sell during a market panic.” In doing so, he joins skeptics who say “ETF selling could spread the effects of a downdraft, because the ETFs are widely held by individual investors, who often flee in a market downturn.”

As noted in the Wall Street Journal article, Bill Gross, who helped found bond giant Pacific Investment Management Co. and now runs a fund for Janus Capital Group Inc., sent a note to investors last month bemoaning the lack of liquidity and how “mutual funds, ETFs, and even index funds” might be hit in a downturn. “The obvious risk – perhaps better labeled the ‘liquidity illusion’ – is that all investors cannot fit through a narrow exit at the same time,” Mr. Gross wrote.

If you are an individual or institutional investor who has any concerns about Bond ETF investments having been recommended for purchase in either your retirement or non-retirement accounts, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

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