Exchange-traded funds just can’t stop reeling in assets and it’s not hard to see why. They provide the ability to invest in everything from an index to corporate debt to commodities through a security that’s as liquid as a stock. Or at least that’s what many promise.

But behind the ETF tickers – which you can easily find on any online brokerage platform – are underlying assets that might not be so easy to trade when things go south and more folks head for the exit than the entrance. That has some of the biggest players in the space preparing for a time when they might need emergency liquidity.

Vanguard Group in Malvern, Pa., the second-largest provider of ETFs, and New York’s Guggenheim Investments are two of a handful of firms that have recently upsized their credit lines, giving them more cash to pay investors who want out.

Brock Moseley, founding partner of Miracle Mile Advisors in West Los Angeles, which manages more than $400 million and uses ETFs as a centerpiece of its investment strategy, thinks these firms are making the right move. He said he also knows of ETF providers that have taken out insurance as another protective measure.

“If they’re purporting that they can provide liquidity, they have to do everything they can to create that liquidity,” he said. “That’s their job.”

Stocks might rise or fall in value, but it’s not hard to enter and exit positions, even if it involves taking a painful haircut. An emerging-market corporate bond, though, doesn’t work like that, so an ETF provider that’s assembled a security that holds bonds has to figure out the other end of the trade if a holder wants to sell.

It’s not hard to foresee a situation in which interest rates rise and a lot more people want to exit fixed-income ETFs than enter them. That could create a liquidity crunch, which is exactly why Vanguard and others are preparing for a mass-redemption scenario.

Moseley believes good ETF providers will do what it takes to provide that liquidity, but with it being so easy for retail investors to get into ETFs, it’s critical for them to understand that they are not stocks. If someone wants an investment portfolio that they can also tap for emergency cash, a corporate bond ETF might not be a good fit. Moseley said ETF investors should closely scrutinize the liquidity of the underlying assets, but he worries too many are not.

“Not enough people are doing the due diligence to understand the risks and rewards of different investments,” he said. “That’s what’s got us in trouble all along.”

Home Economics

Everyone knows about the Bay Area’s tech-infused economic expansion, but Scott Anderson, chief economist of San Francisco’s Bank of the West, says there are plenty of exciting developments happening downstate, too.

“The Los Angeles economy is really hitting on all cylinders,” he said. “It’s the envy of a lot of the country.”

A major part of that, Anderson said, is that many California households are in a healthier debt situation than they have been for some time. That’s the product of a combination of low rates, a growing economy and more frugal spending habits from a generation scarred by the financial crisis.

“When I look at debt service burdens (in California), they’re the lowest we’ve seen since the 1980s,” he said.

Meanwhile, he said that he’s seen businesses in Los Angeles more eager to take on debt, with double-digit growth in commercial and industrial lending here.

But despite that and other positives he sees in Los Angeles, including an influx of foreign investment that’s boosted real estate and ancillary industries, he does believe there are certain areas for improvement.

Southern California is still heavily tied to construction, a cyclical industry with booms and busts. And while the Bay Area is home to tech giants like Google Inc. that employ thousands, L.A. companies have trended smaller and leaner.

“Tech has not been a huge job creator in Los Angeles,” Anderson said.

Counter Parties

Los Angeles may be losing some lenders to big bank buyouts, but other local institutions are chasing Wall Street money on a much smaller scale. On May 19, First Choice Bank in Cerritos became the third L.A.-area bank to list on the OTCQX market, the highest-level over-the-counter marketplace, in the last year. That exchange has been working to attract over-the-counter banks, which, unlike many other OTC-traded companies, already have to comply with strict financial reporting requirements.

Downtown L.A.’s PBB Bancorp joined the exchange in March, and Mission Valley Bancorp in Sun Valley did so in June.

Listing on the OTCQX exchange, which is administered by New York’s OTC Markets Group, gives banks increased access to public capital without the costs of listing on the Nasdaq exchange. Also, as the exchange requires issuers to be sponsored by third-party investment banks or law firms, an OTCQX listing provides another stamp of legitimacy.

“We are pleased to provide this valuable channel of liquidity for our shareholders,” First Choice Chairman Peter Hui said in a May 19 press release.

A handful of local bankers told the Business Journal last year they would consider moving to the OTCQX market if they saw banks listed there getting some big-exchange benefits.

C-Suite News

Mid-City institutional investor crowdfunding platform AssetAvenue has hired Varun Pathria as chief investment officer. He was previously a senior vice president at Santa Monica private equity firm Colony Capital.

Staff reporter Matt Pressberg can be reached at mpressberg@labusinessjournal.com or (323) 549-5225, ext. 230.

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