Today's link:
Why ETF's give an uneasy sense of deja vu, at the Financial Times:
And even if investors are wise enough to understand the risks of individual ETFs, the bigger structural impact is not well understood. The FSB, for example, fears that liquidity mismatches and poor collateral practices could create unpleasant markets jolts in a crisis. It also notes there are potential conflicts of interest because of “the dual role of some banks as ETF provider and derivative counterparty.” And there is another, more basic concern: precisely because the market has exploded with such stunning speed, it may be changing flows in unpredictable ways.
The commodities sector is one case in point: though politicians like to blame hedge fund “speculators” for price swings, ETFs may be as important as hedge funds in recent price trends. But many other asset classes are affected too. As I noted in a recent column, recent swings in the Vix (volatility index) may reflect a recent boom in volatility-linked notes.
Some canny hedge funds, of course, understand these shifts, and are making profits by trading these flows. But less agile investors risk being stranded (including those invested in ETFs). And, more broadly, “the impact of such innovations on market liquidity and on financial institutions servicing the management of the fund is not yet fully understood by market participants, especially during episodes of acute market stress,” the FSB says. Just look at this week’s stunning swing in the silver market. Or, for that matter, last year’s “flash crash”.
I just read a story the other day saying that the triple-long or triple-short ETF's were being held by some investors long-term, even though these Funds' value goes to nothing over time, and they were only meant to be traded over short intra-day periods. Similarly, the commodity ETFs were getting gouged by the regular market traders each time they had to roll their long positions. Retail investors always are the patsies at the table.
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