In the wake of recent weeks’ volatility and pricing dislocations across the exchanged-traded product space, news media and Mutual Fund marketers are having a field day putting the feet to the fire–and those toes being torched are connected to the universe of juiced-up and levered ETF and ETN products, as well as hedge funds that specialise in so-called “risk-parity funds” that employ lots of leverage. Is it fair to bash these ‘alternative’ strategies, or should the SEC require that the prospectuses (or is it “prospecti”?) for these protein-enhanced products have a coverage page that displays Caveat Emptor in caps? For those not fluent in Latin, the phrase means: Buyer Beware.

NYT Dealbook columnist Landon Thomas Jr. poses that issue in his a.m. piece: “Investment Strategies Meant as Buffers to Volatility May Have Deepened It”–and before pointing MarketsMuse readers to that article, MarketsMuse editors remind our readers that ETF red flags are nothing new. Levered products, often in the form of ETNs (exchange-traded notes) that seek to either mitigate risk or enhance returns via the use of futures products are notorious for being fit for trading market professionals only; not retail investors and not even for so-called sophisticated institutional investment managers.

Corporate bond ETFs have also been put on ‘watch lists’ in recent months, even though they are all the rage for many of the right reasons, including offering exposure and ‘greater liquidity’ for those needing to allocate investment  funds to corporate debt issues across various industry sectors and ratings categories. That said, Apocalypse Watchers warn that when interest rates spike, corporate bond investors will all run for the exits together (to avoid mark-downs in their holdings) and the market-makers who specialize in ETF products connected to this asset class will be overwhelmed with nowhere to go–and no [reasonable] bid to offer to those sellers–simply because the glass-is-half-empty crowd contends those market-makers will be unable to find buyers for the underlying constituents as a means to hedge their purchase of the cash ETF product. That particular thesis has not yet been fully tested, but it does offer an agenda for spirited debate.

The Dealbook column does put context into the discussion with the following:

Defenders of risk-parity investing say that these investment styles are not set in stone and that portfolios can be recalibrated on fairly short notice to make them less vulnerable.

As for E.T.F.s, practitioners say that the funds to date have held their own despite some concerns over how portfolios were being valued during the very sharp market sell-off late last month.

Some of the more exotic E.T.F.s that rely on leverage to juice investment returns could in some instances be the “tail that wags the dog,” said Steven Schoenfeld, an early pioneer in E.T.F. investing and founder of BlueStar Global Investors.

“But the fundamental advantage of E.T.F.s — transparency, liquidity and variety — that remains,” he said.

What remains unclear, however, is how an investing community that has become accustomed to churning out safe and steady returns in a low interest rate, low volatility environment adapts to the new reality of wild market swings.

Such sharp ups and downs in the market are expected to become more frequent as the time approaches for the Federal Reserve to push interest rates higher.

People might as well get used to them, says Nicolas Just, a portfolio manager at Natixis Asset Management, a French fund company that oversees $904 billion in assets.

“These types of sudden market swings will become more and more frequent,” he said. “So you have to be prepared for them at any time.”

For the full story from the NY Times, click here