Why ETFs are dangerous

Bedlam Asset Management is worried about ETFs. Our colleagues on FT Alphaville have already noted their concerns so I won’t go into detail. Suffice to say that Bedlam thinks parallels can be drawn between the evolution of ETFs from simple low cost product to complex sophisticated product with hidden costs and the expansion of securitisation that eventually led to the sub prime debacle.

Bedlam is an active manager so doesn’t use ETFs. But the possibility of a fraudulent operation being discovered and causing a run on gold, for example, as people sell out in a panic would have wide repurcussions. So it is alerting the market to this possibility.

It is not advising investors to get out of ETFs on the basis of unproven suspicions. It says:

To take action on an unproven hypothesis and risk losing out on serious investment gains is neither good advice nor an intelligent approach.

The majority of funds are honest and the market largely clean, says Bedlam. But in encouraging complexity to add commissions and boost profitability, investment banks have opened the door to dubious practices.

Bedlam may be crying wolf, but they are right that it is not easy to know what is going on in an ETF, particularly where derivatives are used to create the exposure. Investors should not take ETFs at face value.

About the blog

FTfm is no longer updated but it remains open as an archive.

FTfm's specialist writing team offer their insights into the global fund management industry.

About the authors

Pauline Skypala has been editor of FTfm for four years having previously been deputy personal finance editor. She joined the FT in 1999 and has been writing on savings and investment issues throughout her career.

Steve Johnson, FTfm deputy editor, has been a journalist for 17 years, 10 of which have been with the FT.

Sophia Grene, reporter on FTfm, has been a financial journalist in print and online for 12 years.

Ruth Sullivan has worked as a financial/business journalist and foreign correspondent and for the past 10 years has been at the FT.