You know there’s probably something a bit quixotic about the crusade to warn of an eventual blowup in the high yield ETF space. I’ve been railing against those products for years – long before Heisenberg was Heisenberg.

The blowup of the short vol. ETPs reignited the debate and there’s certainly a sense in which the wipeout of the Seth Golden crowd seemed to presage something – although what that “something” is isn’t yet clear.

The obvious conclusion to draw is that to the extent damn near everything has become an expression of the increasingly ubiquitous short vol. trade, XIV and SVXY were just the tip of the proverbial iceberg. But that’s kind of an endless regression. I mean, don’t get me wrong, I’ve been predisposed to shrieking about things that represent “implicit” short vol. strategies, but the waterfall effect doesn’t affect all of those strategies equally and if you’re not careful, you can wind up in the crowd that spends their time penning short vol. manifestos that read like Revelations.

When I talk about the high yield ETF space, I generally focus on the underlying liquidity mismatch which, to me, looks incontrovertible. Howard Marks and Carl Icahn have variously maligned the same structural problem. I have yet to read a refutation of those criticisms that doesn’t essentially beg the question by positing some semblance of benign market conditions. You cannot promise intraday liquidity against a basket of relatively illiquid assets. It’s philosophically impossible. Obviously, it can work for a while (and theoretically indefinitely) by way of an intervening mechanism that allows participants to arb away disconnects. But if that arb relies on people not being in panic mode or being otherwise willing to catch falling knives, well then it stands to reason that in a pinch, the intervening mechanism that allows for the transformation of illiquid assets into ETF units with intraday liquidity will cease to function and at that point, the ETF is only as liquid as the assets it represents.