Carl Icahn vs. Larry Fink: Should advisers fear junk bonds?

Legendary activist investor sounds the alarm

Jul 16, 2015 @ 2:09 pm

By Jeff Benjamin

Activist investor Carl Icahn's public rant against high-yield bond ETFs at an investment conference Wednesday has drawn a lot of attention, but mostly for its shock value, according to analysts and market watchers.

On Mr. Icahn's charge that exchange-traded funds are bad for the bond market, Todd Rosenbluth, director of mutual fund and ETF research at S&P Capital IQ, said the opposite is probably more accurate.

“ETFs add liquidity to the marketplace, they don't take it away, especially bond ETFs because they take securities that don't trade as often and add liquidity to them,” he said. “At the same time, bond ETFs make up less than 1% of the global bond market, so I just don't agree with the idea that bond ETFs are going to cause havoc in the bond market.”

A large part of what made Mr. Icahn's comments so sensational is that he was sharing the stage with BlackRock Inc. chief executive Laurence Fink.

(More: Sage or simpleton? 8 pears of investment advice from Carl Icahn)

As part of his general criticism of bond ETFs, Mr. Icahn chided Mr. Fink by declaring that, “I think BlackRock is a very dangerous company.”

Mr. Icahn's core premise was the bond ETF space is a ticking time bomb that could go off when rates start to rise and investors start selling to avoid the pain of falling bond prices.

Christian Magoon, chief executive of YieldShares, has a different take on liquidity in the bond market.

“The ETFs are more actively traded than the underlying, and they give the underlying market liquidity,” he said.

While Mr. Icahn worries about the liquidity in the bond market as bond ETF and mutual fund investors potentially rush to the exits, Mr. Magoon believes the market will work itself out, and he cites the recent example of the Greek stock market.

“The Greek stock market was closed due to the crisis there, but the Greek ETF (FTSE Greece 20) kept trading here in the U.S. and you could see that the price was actually more accurate than what the market was worth on the last Greek market trade before it closed,” he said. “More trading and activity is a better indication of what the pricing is for those underlying bonds in the bond ETFs.”

Mr. Icahn's longtime reputation as a vocal activist investor has some interpreting his comments as fuel to generate news on which he can invest.

“Carl Icahn can say anything he wants and he will get the news he wants,” said Gershon Distenfeld, direct of high-yield debt at AllianceBernstein.

“His agenda is that he needs high-yield bonds to go down, so he's looking for a story about that,” Mr. Distenfeld added. “I actually think ETFs have been good for the marketplace; I just think they're a terrible deal for investors because they have to trade a lot and that bleeds the value of them.”

Mr. Distenfeld also disputes the notion that ETFs have hurt or are hurting liquidity in the underlying bond market.

But the liquidity debate remains open, mostly because it has never been tested in such an unprecedented interest rate environment on a market the size of the current ETF and mutual space.

“I agree with Icahn, fundamentally, and so does, [Federal Reserve Chairwoman] Janet Yellen and so does the Treasury,” said Bob Rice, chief investment strategist at Tangent Capital.

“Right now, the liquidity in the bond market is disguised by all the money that has been coming in, but the vast majority of the underlying bonds don't even trade daily,” he added. “Let's assume the Fed raises rates, and investors see some losses and want to redeem their ETF shares, you've got a real chance for real volatility in the bond market.”


Who is right?

View comments

Recommended for you

Upcoming Event

Sep 10


Denver Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video


What is causing the fever for RIA deals?

Deputy editor Bob Hordt and senior columnist Jeff Benjamin discuss factors adding fuel to the M&A fire in the independent advice space.

Latest news & opinion

Merger mania: Why consolidation in the RIA space is about to explode

The pace is expected to pick up as big firms seek to get even bigger and older advisers look to cash out.

Voya Financial Advisors exposes more sensitive adviser information on its website

List of top advisers at the firm comes after Social Security numbers were put at risk.

Securities America hit with lawsuit seeking $18 million in damages

Firm is dealing with the fallout from a rogue broker it fired a year ago.

Brian Block continues his legal fight to stay out of prison

A judge denied Mr. Block's motion for a new trial, but he wants another day in court.

10 social media stars you're not following yet, but should be

Some of the great people using social media to discuss wealth management and financial advice who might not be on your radar.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print