USA TODAY International Edition
Icahn’s criticism of ETFs spurs backlash
Investor doesn’t understand them at a ‘ basic level,’ experts say
Billionaire investor Carl Icahn tossed a small hand grenade into a fellow Wall Street titan’s lap Wednesday when he offhandedly called BlackRock — the manager of a massive $ 4.7 trillion for pension funds and other investors — “an extremely dangerous company.”
Icahn, a well- known activist investor, was referring to risks in exchange- traded funds ( ETFs) — a $ 2.1 trillion market dominated by BlackRock. ETFs give inves- tors exposure to baskets of securities through shares that can be traded like stocks.
Specifically, Icahn is worried about high- yield ETFs in an environment of rising interest rates. If the junk bond bubble bursts, mom- and- pop investors who have swarmed to high- yield bond ETFs for juicier returns could suddenly find themselves trapped, Icahn said.
Icahn’s remarks were provocative in part because he made them while sitting next to Larry Fink, BlackRock’s CEO, at the CNBC Institutional Investor Delivering Alpha Conference. At one point, Icahn described a scene in which Fink and Federal Reserve Chair Janet Yellen push a party bus off a cliff into “a black rock.”
But experts agree with Fink that Icahn is “just dead wrong” in singling out ETFs.
“If there’s a high- yield bond crash, it doesn’t matter if you own them in a high- yield bond fund or an ETF,” said Joshua Brown, a financial adviser at Ritholtz Wealth Management. Everyone will get hurt, Brown said.
Plus, ETFs make up a minuscule part of the $ 1.54 trillion junk bond market, or just 2.2%, according to Morningstar. Mutual funds, by contrast, make up 17% of the junk bond pie.
“I think ( Icahn’s) comments were indicative of the fact that he fundamentally doesn’t fully comprehend how ETFs work at the very basic level,” said Ben Johnson, director of global ETF research at Morningstar. ETFs are “this space ship that has landed in Carl Icahn’s backyard, and he doesn’t know what to do with it, so he is throwing rocks at it in hopes that it will go away,” he said.
Where ETFs differ from mutual funds is that investors expect to be able to buy and sell on a dime and watch their shares move accordingly. Mutual fund sales, by contrast, are tabulated once at the end of the day.
This has led to criticisms that ETFs could be more susceptible to intra- day panic selling, especially since they are primarily owned by retail investors.
But the idea that retail investors will sell at the same time on the same day is unrealistic, said Jeff Tjornehoj of Lipper.