The second line of defense is the ability to redeem ETF shares if the market maker -- a bank or other "authorized seller" -- thinks ETF prices have fallen too far relative to the underlying assets.
If this happens, the market maker can hold the ETF units back until the market recovers, matching the risk with a derivative contract.
They could also exchange units with the ETF provider for cash or the underlying assets, which they can either sell, pass on to the end investor or hold until prices recover.
So far, this has worked well. But KPMG's Nair warns that a complete liquidity crunch is yet to test market makers' willingness to perform as such.
"They'd have to sell it into a market that's going down -- in that worst-case scenario, although the secondary market could still operate, these primary market makers could evaporate."
This article was provided by Reuters.