ETF.com had a detailed post titled How Illiquid Are Bond ETFs, Really? Over the years certain ETFs have had problems with pricing in the face of extreme market events. This first came to the fore in the fall of 2008 for fixed income funds when the bond market didn’t function correctly for a short while (subjectively may you think a long while as markets for commercial paper and floating rate preferreds were devastated).

Since then there have been a couple of other instances where ETFs “didn’t work” for a very short period.

Part of the equation as we learned in 2008 was that the ETFs trade more regularly than the things they track, this can be true for fixed income markets for example but typically not for domestic equities, which is a point Dave Nadig explores in great detail in the above linked article.

If you use ETFs then you should read the article to better understand the potential drawbacks to using ETFs but there are drawbacks to traditional funds as well as individual issues. One solution is to not invest at all, which I am not dismissive of but the drawback there would be the need for a much higher savings rate.

It has been three months since that 1000 point down open for the Dow when a lot of these ETF issues popped up again in conjunction with investors and advisors getting whipsawed badly as stop order selected based on an inefficient open where funds traded at very wide discounts. As an oh by the way, if you missed it, the NYSE and NASDAQ will no longer accept stop orders.

The idea that investment products have drawbacks is not a new one as far as this blog is concerned but maybe it is correct to that the drawbacks are evolving or we are learning more about them at least as far as ETFs are concerned.

Where there is risk that ETFs may not price correctly or efficiently it makes sense to position yourself where you are not subject to the risk, specifically being in the position where you must sell when one of these extreme market events is underway. This is not a comment about timing the market more like “ok, the market just fell 8% in ten minutes, it’s probably not a good time sell for the monthly withdrawal or rebalance (assumes speculating on an extreme market event is not part of the investment strategy).