Not Everything Should Be ETF’d

From Physical Risk to Institutional Solutions

Holding physical gold at home or in a safety deposit box isn’t practical—or safe—for most investors. But with ETFs like

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, gold exposure becomes as simple as owning any other stock or fund. Similarly, crypto custody once came with steep learning curves and hardware wallet risks.

Some investors embraced cold storage; others lost access to millions by misplacing private keys. Now, regulated ETFs holding bitcoin in institutional cold storage—often with insurance—relieve that anxiety, while still delivering the exposure.

Simplifying the Complex

ETFs have also removed layers of complexity from investments that were once operationally burdensome. Consider:

• Futures-based ETFs eliminate the need to roll contracts, manage margin, or understand contango/backwardation dynamics.
• Options strategy ETFs package income-generating structures like buy-writes or put spreads into a single ticker.
• Commodities ETFs offer access to global resource markets—oil, silver, natural gas—without requiring a futures account or physical delivery logistics.

But What About Thin Markets?

This democratization hasn’t come without its challenges. Some asset classes are simply too thin or specialized to absorb ETF-driven retail or speculative demand.

Markets like:

• Frozen Concentrated Orange Juice (FCOJ)
• Corn, especially during crop failures or supply shocks
• Platinum or rare earth metals

...don’t always have the depth to handle significant ETF inflows without distorting price discovery or impacting the industries behind the commodity.

One of the most well-known examples is the United States Natural Gas Fund (UNG). In 2009, as investors piled in to bet on a natural gas rebound, UNG’s assets surged—and ran headfirst into exchange-imposed position limits on natural gas futures. To comply, the fund was forced to suspend share creations, a rare move for an ETF.

This suspension had cascading effects:

• UNG began trading at a large premium to its NAV, as no new shares could be created to meet demand.
• The fund’s roll activity became so large that it distorted the natural gas futures curve, effectively becoming “the market” during roll periods.
• Many retail investors misunderstood the product’s structure and mistook it for a spot price tracker, unaware of the complexities of futures-based exposure.
• Not all market participants understood how the mechanics of position limits and halted creations would impact price behavior. As a result, market makers and investors got caught in a short squeeze, leading to meaningful losses and forced unwinds.
• The ripple effects were felt across the natural gas industry, creating disruptions not only in financial markets but in physical hedging and commercial pricing activity as well.

UNG’s episode was a turning point—a clear signal that while ETFs offer accessibility, structure and market depth must be carefully aligned.

This raises a critical question: Should every asset be ETF’d?

While innovation and access are cornerstones of the ETF industry, not every asset class is well-suited to daily liquidity in a transparent wrapper.

The Structural Mismatch Risk in Private Markets

ETFs promise daily liquidity and transparency, but not all assets are compatible with that promise. This is especially true in the private asset space—particularly private credit and infrastructure—where:

• Pricing may be infrequent or subjective
• Underlying assets may be illiquid
• NAVs can diverge meaningfully from perceived value
• Exit liquidity may vanish in periods of stress

And that raises even deeper questions: Who is selling these assets? Who determines their value? If only one or two liquidity providers are involved, it's likely they’re selling above their own fair value estimates—so what does that bid/ask spread really look like?

When volatility spikes, who is stepping in to catch the falling knife—and is it one inch from the ground, or still far from fundamental fair value?

In markets like these, pricing becomes a negotiation more than a discovery, and the risks of misalignment between perceived value and exit value multiply. It starts to resemble the gold rush analogy: the people who made the most money weren’t the miners—they sold the shovels.

While some ETFs are pushing into these spaces, the wrapper must be carefully considered. Not every investment can—or should—be repackaged into a daily traded vehicle.

The same caution applies even within equity markets. For instance, Frontier Markets ETFs were once hailed as the next big growth frontier, offering access to emerging economies poised for expansion.

But after two decades of involvement, many of these markets have underperformed or faced persistent challenges—ranging from political instability to limited capital markets infrastructure. As a result, many Frontier Market ETFs have liquidated due to lack of investor interest and viability.

Recent closures include:

• iShares Frontier and Select EM ETF (FM), which ceased trading after market close on January 6, 2025, due to persistent liquidity issues in frontier markets.
• VanEck Egypt Index ETF (EGPT), liquidated in March 2024 following prolonged underperformance and political instability.
• Global X MSCI Nigeria ETF (NGE), closed in July 2023, as capital controls and repatriation restrictions impaired fund operations.
• Invesco Frontier Markets ETF (FRN), liquidated in February 2020 due to limited investor interest and product viability.
• Global X Next Emerging & Frontier ETF (EMFM), delisted after extended struggles with illiquidity and lack of scale.

These examples highlight that even in public equities, accessibility must be balanced with structural integrity, liquidity, and operational reliability. While these were all great ideas at launch, they have become hard lessons learned for issuers, investors, and capital markets desks alike.

Their closure doesn’t mean there shouldn’t be another round of new ETFs targeting these regions in the future. But perhaps it signals that structural reforms are needed within these countries—both economically and operationally—to earn back investor trust and support long-term fund viability.

Learning from Failure Makes the Ecosystem Stronger

While some ETF launches have faced challenges or even failure, these setbacks often lead to industry-wide improvements. One standout example is the United States Oil Fund (USO) during the COVID-19 crisis in 2020.

At the time, USO was primarily exposed to front-month oil futures. When demand collapsed and storage capacity dried up, the price of front-month contracts plunged—briefly turning negative. USO, caught in this extreme market dislocation, saw massive price swings and became a focal point of retail speculation.

To protect investors and ensure better product stability, USO subsequently adjusted its methodology to hold a more diversified mix of oil futures contracts across longer durations.

While this meant the fund no longer tracked near-term spot prices as closely, it became a more durable and structurally sound product—better suited to survive market dislocations and regulatory pressure.

This example illustrates an important point: ETF missteps often prompt critical structural refinements. The result? A stronger, more resilient ETF ecosystem that evolves alongside the markets it serves.

Conclusion: The Bridge, Not a Trap

For most investors and most asset classes, ETFs have been a resounding success. They’ve removed complexity, reduced risk, and made institutional exposures accessible to anyone with a brokerage account. But access alone doesn’t solve every problem. Liquidity, transparency, and structure still matter.

As ETFs continue to evolve, it’s crucial that issuers, capital markets experts, and investors alike understand where the structure shines—and where it strains. Because while ETFs can be the bridge between Main Street and Wall Street, that bridge needs to be built on solid footing.

About the Author

Nicholas Phillips | President of ETF Capital Markets Advisors LLC
With over 25 years of experience in ETF market making and capital markets, Nicholas Phillips is recognized as a subject matter expert in the ETF industry. He started his career spending the first ten years as a lead market maker for SIG and Goldman Sachs.

At the helm of MCAP LLC's ETF Desk, Nicholas built and scaled the division, enhancing its operations through innovative pricing and risk models, and robust relationships with market makers and issuers. His tenure at VanEck Associates as Director of ETF Capital Markets further solidified his expertise, managing critical facets of operations and deepening connections within the trading community.

Beyond market making, Nicholas is an avid content creator, sharing insights that demystify complex market dynamics. He is keen on exploring board member roles that benefit from his extensive background and forward-thinking approach to ETF strategies. His dual US/Ireland citizenship complements his global perspective, enriching his professional endeavors in diverse markets.

Disclaimer

Please note that this article reflects the author's personal views and does not represent the opinions of the publication or its affiliates. It is for informational purposes only and does not constitute investment advice. It is essential to seek guidance from a registered financial professional before making any investment decisions.