Gundlach: Illiquid Assets Don't Belong in Liquid Vehicles

DoubleLine CEO Jeffrey Gundlach expressed concerns about the increasing trend of integrating volatile and illiquid assets like Bitcoin and private credit into ETFs, citing potential systemic risks and liquidity mismatches that could harm investors. Gundlach argues that packaging illiquid assets into daily-traded funds creates a mismatch between the investment's liquidity and the investor's perceived liquidity, potentially leading to redemption issues during market shifts. Instead of these ETFs, Gundlach suggests investors consider gold and international markets like Germany, while advising against long-term Treasury bonds amid economic weakness until governmental policy shifts.

Analysis

DoubleLine CEO Jeffrey Gundlach has expressed significant reservations regarding the proliferation of ETFs designed to hold volatile and illiquid assets, specifically citing Bitcoin and private credit. He contends that incorporating such assets into easily tradable ETF structures introduces systemic risks and a fundamental liquidity mismatch, where the daily tradability of the ETF wrapper belies the illiquidity of the underlying holdings, potentially harming investors during market stress. Gundlach observes that asset classes often become available to retail investors via ETFs only after substantial outperformance, suggesting individuals may be entering these investments closer to market peaks, as illustrated by his comment that "buying an asset after it has already appreciated is essentially chasing momentum." He specifically noted that private credit's strong performance over the past five years was concentrated in the earlier part of that period and its current outperformance is less pronounced. As alternatives, Gundlach suggests gold as a preferable asset to long-term Treasury bonds in the current environment for those concerned about economic weakness, advising against long bonds "not yet" until a governmental policy shift occurs in response to interest rates on long bonds getting "too high." Furthermore, he advocates for diversification into international markets, highlighting Germany's reindustrialization and economic stimulation efforts as a potentially attractive investment and reiterating a broader preference for European and other non-U.S. equities. While Gundlach manages ETFs such as STOT, CAPE, and DMBS, his commentary focused on the structural risks in ETFs holding specific asset classes like cryptocurrency and private credit rather than his own fund offerings.

Key Decisions for Investors

• Exercise caution with ETFs investing in highly volatile or illiquid assets such as Bitcoin and private credit, scrutinizing the potential liquidity mismatch between the ETF vehicle and its underlying holdings, especially if these products were launched following periods of strong asset appreciation.
• Consider diversifying portfolios with exposure to gold as a potential hedge against economic weakness, and explore investment opportunities in international equities, particularly in markets like Germany which Gundlach notes is undergoing reindustrialization and economic stimulation.
• Adopt a tactical approach to long-term Treasury bonds, potentially deferring significant allocations if concerned about near-term economic weakness, while monitoring for potential shifts in governmental policy that Gundlach suggests could make them more attractive later.