Remember when exchange traded funds seemed like the good guys? When they were a cheap, efficient and transparent way for investors to track an index?
Those days are long gone.
Synthetic ETFs using derivatives, inverse and leveraged ETFs, unsecured exchange traded notes, all of these are muddying the waters for simple folks who just want good value investment. They do presumably all have their place, but they tend to undermine the proposition of ETFs as simple and transparent.
The latest is a reverse convertible ETF, shortly to be launched in the US by Rich Investment Solutions, run by Kevin Rich, who was previously responsible for Deutsche Bank’s initiative in bringing commodity ETFs to the US. Reverse convertibles are a structured product too complicated to explain here*. Press releases claim the ETF will simplify this structure, although I’m confused on how an index writing “down and in” options each quarter on the 12 most volatile stocks in the S&P 500 is really simple.
Again, there may be nothing wrong with this product at all, but if I were a physical ETF producer, I would be lying awake at night worrying about the brand. It’s hard to tell people you have a product they can understand when they can see something with the same name tracking reverse convertibles.