A battle royal between the mutual fund dinosaurs and the exchange-traded fund upstarts is hitting the US retail investing market. This is the result of the failure of ETFs to do what they were supposed to do during the China-triggered August stock market selloff. Rather than maintaining liquidity in markets, ETFs—especially the biggest ones—dropped like a stone leaving investors who needed to sell and others who had simply entered a market order getting a pittance.

The ETF contingent are unrepentant. My Qwafafew buddy Herb Blank, one of the founders of the ETF wave (he developed “country baskets”, an early variant) wrote to me:

“Anyone who reads Barron’s or WSJ or Forbes knows all about how those DEMON ETFs destroyed the market on August 24. I’ve seen that article on the desk of every wholesaler who hawks actively managed funds. “

The fact that the ETF collapse is being used to peddle non-indexed stock-picking funds does not excuse their failure to perform as expected in the selloff, worst of all supposedly all-weather or hedge ETFs. On August 24, the market’s circuit-breakers were triggered 1300 times to halt all trading of ETFs.

While ETF partisans blame the huge price swings on new govt regs put in place after the May 2010 flash crash, others (like me) think there are fundamental flaws in the ETF concept. ETFs requires qualified institutional buyers to find disparities between the prices of ETFs and their holdings. Then the institutions intervene by creating or destroying ETF shares to put them back in alignment with their portfolios. This they offset by purchases or sales of the underlying securities for a mini per share profit which can mount up.

When markets crash nobody, not even a computer program or robot used to more reasonable disparities, has time to work out the valuations and do the trades.

Chief economist Willem Buiter of Citi Research now predicts that China will trigger a global recession during the next two years, as its lagging growth hits first emerging markets and then the rest of them. This is a revision of the more optimistic economic forecasts put out at the start of the year. That’s the bad news. The good is that while the risk is high, the recession will be moderate with recovery starting in 2017-8.

His analysis cites the fact that “evidence for a global slowdown is everywhere.” Already, “the main driver of global underperformance during the past two years has been EM [emerging market] weakness.” “Even success stories like India, central and eastern Europe, and Mexico are not outperforming our forecasts.”