ETFs

Pauline Skypala

The exchange traded fund industry has been feted as offering low cost access to a wide range of investment opportunities. It has occasionally had its knuckles rapped for getting over-enthusiastic about short and leveraged products that may not track in the way investors expect. But generally, the plain vanilla FTSE 100 or S&P 500 ETFs have been seen as A GOOD THING.

 Now along comes Watson Wyatt to throw a bucket of cold water on the ETF party. The consultant says institutional investors can get a better deal elsewhere. There are institutional index products with lower fees, a better tax structure, and less or no counterparty risk.

Sophia Grene

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.

Sophia Grene

Synthetic ETFs – an efficient way to use modern financial technology to do something useful for investors or a sinister investment banking kinda plot to cream off extra revenue from naive investors who just want to track an index?

In Monday’s FTfm, former Eurizon chief executive Francis Candylaftis called for these evil instruments to be cast into the outer darkness. This sparked a thoughtful explanation by FT Alphaville of precisely where the problem might lie (hint – it’s about the bit where you need collateral), using db x-trackers’ own diagram of how it all works.

Then blogger Andrew Clavell picked up the theme, suggesting a much firmer regulatory hand on the collateral would solve the problem.

Does anyone else have any suggestions?

Sophia Grene

Burglar makes off with swag in swag bag

The banks be stealing our ETFs!

Exchange traded products – everyone wants a piece of this pie.

Exchange traded funds started as an investment management product. They were run by investment managers, who had to build scale in order to make any money out of them.

Then the European regulations allowed funds to use swaps and investment bankers realised there was an opportunity to use their skills. Lyxor, an offshoot of Societe Generale, but not its asset manager, and db x-trackers set out to promote their synthetically replicated ETFs, but still claimed they were offering investment management.

Sophia Grene

According to the research, most investors prefer full-replication exchange traded funds. That is, they prefer the straightforward product that does something relatively simple – tracking an index – by the most straightforward means possible – buying the underlying stocks.

But db x-trackers and Lyxor, two ETF providers that rely exclusively on synthetic replication, have found no shortage of investors, despite  using derivatives, oh anathema!

A recent survey by Credit Suisse and Deloitte reinforced the notion that investors want the simpler products. 78 per cent of respondents said they would prefer ETFs with full replication methodologies. So what is going on?

According to Oliver Schupp, head of alternatives at Credit Suisse, it is a question of uninformed versus informed opinion.

“When you really take a piece of paper and write down the pros and cons [of full-replication vs synthetic], it comes down to a toss of the coin,” he says. While investors cite increased risk, namely counterparty risk, as the reason for their declared aversion to synthetic ETFs, Mr Schupp points out that many full-replication products use security lending, which has its own counterparty risk.

“The general consensus is that when you sit down with professional investors and walk them through it, they’re comfortable with swap-based ETFs.”

At the moment, Credit Suisse’s growing ETF platform only has full-replication ETFs, but it is planning to introduce swap-based products early next year, so this issue is a live one for Mr Schupp.

Sophia Grene

are ETFs 'good', 'bad', or 'I dunno'?

In the balance: are ETFs 'good', 'bad' or 'I dunno'

ETFS – are they low cost, simple investment tools for the retail saver (GOOD), or a complicated device for enhancing the profitability of investment banks (BAD), or even a bewildering mix of the two (UH- dunno)? If the recent wave of commentary on the blogosphere has left you feeling confused, here’s a helpful guide from the Aleph blog – The Good ETF.

But remember, according to Tadas Viskanta at Abnormal returns, size really does matter for ETFs.

Pauline Skypala

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.

Ruth Sullivan

First there was the product, then the book and now the movie. Well at least a film of exchange traded funds, starring ETF queen Debbie Fuhr, Andrew Clare, asset management professor at Cass Business School and Justin Urquhart-Stewart, founder of Seven Investment Management. 

Sophia Grene

There is a hoary old chestnut about the professor of economics walking through the City with a graduate student. They see a £20 note lying on the pavement across the street, and the student makes as if to cross the road to pick it up.

“Don’t bother,” says the professor. “It must be a fake. If it were real, someone would already have picked it up.”

Sophia Grene

Was it all a dream?

Was it all a dream?

I had to pinch myself to make sure I was awake. I was having lunch with the head of equities from a German fund manager at a Conran restaurant near Tower Bridge. I had asked what trends he saw and the answer flowed as smoothly as the sparkling Perrier.

“I predict a convergence between traditional and alternative fund managers, as long-only managers start to incorporate the new techniques available under Ucits into their toolkit. There is also a blurring between institutional and retail – all these boundaries are blurring,” he said.

This visionary also thought it was possible some investors would ask for more account to be taken of sustainability principles in investing, while he had heard of ETFs, but didn’t think they were likely to take off.

It was as if the whole of the last 18 months had been a dream.

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.

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