By September 20, 2018Financial Planning

The corporate regulator ASIC, recently issued a warning about certain categories of exchange traded funds (ETFs), which may carry the risk of failure.

As the name implies, ETFs are funds management vehicles, similar to unit trusts, with the key difference being that they are accessed through a stock exchange.  The concern is that in some cases these funds may have comparatively high fees, accessing niche markets and having low turnover and poor liquidity.

Liquidity is a common factor in so many market crises over the years.  During the GFC, it was near impossible to sell a property.  Who wanted to buy an illiquid asset when cash was suddenly king?

Similarly, some superannuation funds which had dramatically increased exposure to unlisted assets, found difficulty in processing member withdrawals due to the absence of available liquid assets to fund these redemptions.

Homeowners too can find themselves in a liquidity trap if they borrow too much and then encounter problems such as higher interest rates, loss of income due to ill health, retirement or job re-location.  Properties simply cannot be sold overnight and this often means having to accept a lower price out of necessity.

It is important in any investment decision to be fully aware of the risks as well as the opportunities.  Liquidity is always a key issue that we consider.