The inefficiency he is referring to is that all of the underlying assets are treated the same, regardless of their relative worth/value.  If you sell your ETF to get rid of the junk bonds you are selling the good ones too.  (Or not able to sell at all as in 2008).
My worry is that if everything is bundled in an ETF, who is actually pricing the individual securities?  The good and the bad are bought and sold in unison.