Posted on 07/20/2015 10:13:37 AM PDT by Citizen Zed
Carl Icahn may have billions but he still worries about average investors: specifically, that they're putting too much money into high-risk debt that will be wiped out when the next financial crisis hits.
That line of reasoning is why he's critical of exchange-traded funds that specialize in such debt, including those operated by Blackrock. It is a point he reiterated in a brief interview following last week's Delivering Alpha conference -- after making it directly to Blackrock CEO Larry Fink during the event. Icahn didn't get to say as much as he wanted because the two were on a panel devoted to activist investing, the arena in which Icahn made his fortune and which Fink has criticized.
"Blackrock is sort of a name out there," Icahn said. "And this is one of the problems you had in 2007, where you had brand names on a lot of these housing things. But worse than that, they believe -- and wealth management guys believe -- there is liquidity here."
In the event of another financial crisis, "there's definitely a great risk out there in what this high-yield is doing because it's so big -- $1.5 trillion out there," Icahn said. And that's why understanding what high-yield funds are and how they work is crucial, he said.
In the years leading up to the financial crisis of 2008, many small investors put money into complex financial products linked to the housing market, but didn't understand that they might be worthless once home prices began to fall. The false sense of security was created in part by high credit ratings that masked the risk and the availability of the securities through brand-name financial institutions such as Lehman Brothers, Merrill Lynch, and Citigroup (C).
Icahn fears that type of buying behavior is now occurring again.
(Excerpt) Read more at thestreet.com ...
These types of ETFs have a lot of technical problems.
You have to understand how Sponsors and Authorized Partners arbitrage the ETF share prices to maintain NAV. Then you will understand that if the ETF holds most of the outstanding bonds, and the bonds don’t trade much, then the ETF is essentially illiquid because nothing to arbitrage, because there is no NAV.
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