Retail investors are getting "seduced" by ETFs and ultimately bamboozled during times of market stress, Bloomberg's Christopher Condon and Margaret Collins write. Investors are led to believe that the ETF prices will always be close to their net asset values and that naiveté is exposed under times of market stress.

Some retail investors likely sold at a discount and weren't aware of it, said Mark Wilson, chief investment officer at Tarbox Group, but BlackRock[profile]'s head of fixed income strategy, Matthew Tucker, disagrees with the idea that they are getting swindled.

If a fund’s share price deviates from the last price of its underlying assets, arbitrage traders will jump in and take advantage of the difference, Tucker said. Their buying or selling of ETF shares pushes the share price back in line with assets.

The discount problem has a lot to do with the NAV not reflecting the right price, especially in cases where an overseas stock exchange is closed as shares continue to trade in New York, Tucker said.

Regulators may start examining ETFs further, Cordon and Collins write. More complex ETFs such as derivatives-based funds or funds using leverage have caught the eye of regulators.

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Edited by: Casey Quinlan


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