How ETFs trade during periods of market stress has been one of the main criticisms thrown at the industry in response to its rapid growth since the Global Financial Crisis (GFC).
The idea that ETFs provide an “illusion of liquidity” and should not offer exposure to less liquid parts of the market is an often-used taunt from the mutual fund industry.
However, academic research from Anna Helmke of the University of Pennsylvania has argued this is simply not the case, a fact known by proponents for the ETF wrapper and regulators alike.
In the research, titled Will ETFs drive mutual funds extinct?, Helmke pointed to the role of authorised participants in providing intraday liquidity in the secondary market while mutual funds guarantee redemption at the end-of-day net asset value (NAV).
“ETFs may be more suited for less liquid index market segments favoured by long-term investors,…
