ETF Hit to Emerging Markets May Swell

The ETF theory keeps coming back to haunt me. Brazil, Switzerland, South Korea and India all got hammered more than most emerging markets. You can't blame the various events in those countries for their incredibly sharp market declines.

Although each country had a particular political or legal event (respectively: riots, currency problems with the euro, an arrest of an executive and a government that may not be as capitalist as previously) and each can be lumped into the "higher rates could be a problem" camp, what I think happened is that the ETFs of these countries had attracted a giant amount of hot money and it turned, just turned, all at once, and there was nothing underneath, not a real market to buy the stocks that got spit out by the selloff.

It's almost like the days when there were gigantic withdrawals from high-tech funds that then repeatedly pummeled perfectly good stocks that could not bounce back because of the fund redemptions.

I think that this kind of action is going to make these markets much more difficult to invest in because they are so much easier to get into than to get out of. These markets had long been protected by hit money from a variety of restrictions and a lack of ease of doing business. But all four countries have done their level best to become worldwide markets, and they are now suffering the consequences of our hair-trigger mentality.

If you don't believe me, take a look at the parabolic run in gold. That was, alas, almost purely because people who would not otherwise plunk down $500 an ounce -- let alone know how to do it -- got together and bought ETFs that did just that.

Any time you say what I am about to say you get in trouble: Sometimes the individual investor doesn't understand the risks and rewards of his investments. In these ETFs, that is most certainly the case; we have too much power in the very wrong and inexperienced hands, I believe.

Which means that there could be more downside to come every time anything goes wrong, and the downside will be wildly exaggerated and longer-lasting than we expect.

Just like the redemption days in tech in the '90s.

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