In these volatile times, are stock ETFs safe?

AB CEO: Understanding ETF risks and China
AB CEO: Understanding ETF risks and China   

With the stock market last week getting off to its worst ever start to a new year, investors burned in the August swoon should know the risks of exchange-traded funds, better known as ETFs, said Peter Kraus, chairman and CEO of money manager AB, formerly AllianceBernstein.

Kraus, a critic of ETFs, told CNBC's "Squawk Box" on Tuesday that so far this year ETF liquidity has been strong. "There hasn't been any real sell-off in the equity market as we saw in August. Although the equity market has gone down, it's actually been pretty orderly."

Read MoreIt's time to stash cash: Portfolio manager

The sell-off he was referring to came Aug. 24, when the Dow Jones industrial average fell as much as 1,089 points at the open. The panic selling sent a group of ETFs down about 30 percent, often far below the value of their underlying stocks. Trading in hundreds of such funds was halted that day.

"We need a warning label. We need to understand the risks in ETFs," Kraus reiterated Tuesday. "Stock ETFs showed there can be disconnects between the underlying price and the ETF. That's really dangerous when it happens. It's hard to predict."

"It generally comes in a market when sellers get a little rattled. And they accelerate the sell orders," he continued. "We saw it in August. And ETFs can become incredibly expensive."

Kraus, whose actively managed mutual funds compete with passive index-tracking ETFs, first raised these concerns in in November.

At the time, BlackRock Chairman and CEO Larry Fink, whose firm manages an industry-leading $822 billion ETF portfolio as part of its total $4.5 trillion under management, defended ETFs, saying the problems on Aug. 24 were more related to market structure.

Read More Fink: 'Flash Crash' wasn't the fault of ETFs

Kraus acknowledged Tuesday on CNBC that ETFs can be an effective tool to allow investors to "move in and out of more markets quickly."

But at what cost, he asked. "Professionals … do buy ETFs when they're cheap and sell them when they're rich. And they're actually pretty good at it."

"Everybody else has a harder time with that," Kraus contended, saying investors looking to time the market have to be right 75 percent of the time to beat the more traditional buy-and-hold approach to stock investing.

— Reuters contributed to this article.

Morning Squawk: CNBC's before the bell news roundup

Sign up to get Morning Squawk each weekday

Get this delivered to your inbox, and more info about about our products and service. Privacy Policy.
Please enter a valid email address