"funds would have to report an estimate of how long it would take to
liquidate their entire position for every security held, and would be
limited to having no more than 15 percent of the fund in securities that
would take longer than seven days to liquidate. Fund boards would also
be required to analyze their patterns of redemptions and the funds’ portfolios to maintain a minimum percent of assets that could be dumped
within three days."
"The key provisions of the rule are about unloading the entire position
a fund holds. That means small funds will be disproportionately better
off than large ones. The math here is really simple: Right now, the
iShares Emerging Markets ETF (EEM | B-100) has a 4.1 million share
position in the National Bank of Abu Dhabi, making up about 0.05 percent
of its portfolio.
Based on FactSet’s Portfolio Analysis tool, that would take roughly
eight days to unload. For a fund that was half EEM’s size, it would take
four days. So for EEM, the bank is an “illiquid asset,” but for an
upstart, it’s not. This increases the likelihood that funds will have to either close for new money (leading to premiums) or pollute their
portfolios with off-index-weight positions."
"My initial analysis of EEM—using the incredibly bad method of just
average volume—suggests it’s sitting on about 8 percent of assets that would take longer than seven days to unload. As I said above, the real
number is probably off by more than half. But let’s assume for a moment
that BlackRock figured out a way to keep EEM running and tracking its
How about junk bonds? Or bank loans? The whole premise of these ETFs has
been that they provide liquid access to illiquid assets. iShares
published an excellent paper a few years ago pointing out that in the
corporate bond space, ETFs now hold more in bond assets under management
than the entire corporate dealer market held in inventory."