ETF liquidity will soon become a concern.

Folks, the people who have seen the books at some of the ETFs, especially, it seems from this article, high yield bond ETFs like ticker:JNK are cautioning the elite investors in the only way they know how to do so without passing insider information and making themselves targets of legal action down the road.  Carolyn Wilkins, a good little Canadian liberal bureaucrat knows the real score which is that once interest rates begin to move up the leveraged nature of the ETFs is going to present a problem when the selling begins.

In other words, as interest rates rise, the value of the junk bonds fall.  People who are watching carefully will GTF out before they are left holding an empty bag. Wilkins is warning that the funds might not be able to sell enough assets in order to pay those who want to get out of the Ponzi if too many people bail at the same time.  In other words, its essentially a fractionally reserved system; AKA a Ponzi scheme.

Also, if these ETFs actually hold the bonds that they say they do (which I think they do not) then the problem won't be basic liquidity.  There is always going to be a market for anything.  The problem will be the sudden discount demanded by the market.

So lets say you are a junk bond ETF and you bought all these high interest non investment grade debt notes from entities that may or may not be able to repay them according to the terms of the bond.  Let's say everyone of those entities are making their interest payments on time.  But let's also say that interest rates begin to rise.  This will kill the market value of junk bonds faster than investment grade ones and those who bought these ETFs know this.  So when rates begin to go up despite fed promises to keep them low (as if they are God or something....) the ETF "investors" will sell their shares.  Since the ETF managers are also market makers for their ETFs, they have to buy when someone wants to sell.  But in order to pay to buy them, the ETF has to sell assets.  But if there is nobody there to buy the assets, the ETF manager will not have the money to pay the ETF investors even if the underlying debt is still being serviced by the debtors.  In this case, the ETF either gets a loan to tide them over while enough bonds mature in order to generate the needed payout cash OR they have to crash the price of the ETF to reflect not the value of the underlying assets but rather their lack of liquidity.

The real question at that time becomes: does government back stop the illiquid ETFs or does the ire of the people scare politicians enough that they just let the cards fall where they may.

I don't think the public wants to bail out Wall St anymore.  Because of this, expect massive volatility across the board, not just in ETFs and not just in bond ETFs.  Some of these ETFs do not have the assets they claim they do IMO.  They tell people they have them and then they use the cash that should have been used to buy the assets to go speculate on the Bernanke put.  This kind of scammy behavior can make you millions and millions of dollars if you get in, do your damage and then get out.  The problem is that it works so well the first, second, fifth and tenth times that the con men playing these games think that it will go on forever.  That's when they get caught and that's when the investors in the ETFs realize that if you are gambling in the markets and don't know who Mark or Patsy is, it;s you.