A wave of selling caused many exchange-traded funds to tumble below the value of their underlying assets, as a bond market sell-off caused stress in the $2 trillion ETF industry.
ETFs track baskets of underlying assets, such as emerging-market stocks or municipal bonds, but discounts widened sharply on Thursday as dealers struggled to keep up with the sell orders. The selling also caused disruptions in the plumbing behind several ETFs. Citigroup stopped accepting orders to redeem underlying assets from ETF issuers, after one trading desk reached its allocated risk limits.
ETFs have been a boom product in recent years. They are bought and sold as an equity but can hold a variety of assets that are less liquid than exchange traded stocks. The heavy selling across global markets triggered the disruption in products that track less liquid assets such as municipals or securities in markets that are closed during parts of the US trading day.
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