6/27/2014 6:15 PM ET|
These ETFs should be rated R
While most index funds are suitable for all investors, even professional traders ought to be wary of leveraged ETNs.
There's been a flurry of articles about the dangers of exchange-traded funds. BlackRock's Larry Fink said leveraged ETFs could "blow up" the industry, even though they have microscopic assets and own less than 0.02 percent of the derivatives market.
There's also been chatter about potential problems with ETFs that track illiquid assets, such as senior loans, if there's a run for the exits. A recent Ventured & Gained post looked at exchange-traded notes (ETNs) and some risks they pose.
While there's no real evidence that ETFs pose a systemic risk, they can hold some pretty exotic stuff. And just because they trade like stocks, that doesn't mean they're all as liquid or straightforward as stocks. Perhaps the unique dangers of some ETFs should be flagged more prominently.
One solution is "gating." That means requiring a separate set of disclosures for products that cross a certain line based on their use of leverage or derivatives.
Makes sense; getting people to read those disclosures is another matter. And if you gate, where do you draw the line? Should commodity ETFs be gated? Hedge fund replication ETFs? Junk bonds ETFs? ETFs are nuanced, and their riskiness and complexity don't come from their holdings or regulatory structure alone.
Now, movie ratings -- there's a system everyone understands. Here's how that might apply to the ETF universe:
Anything that holds developed market stocks or bonds using standard market capitalization-weighted indexes. This is for straightforward ETFs with no complicated tax implications. Think Vanguard.
Any ETF that track stocks or bonds but uses an index that isn't weighted by market cap and that attempts to outperform the market, like smart-beta and actively managed ETFs. This category would also include physically backed commodity ETFs such as gold and silver.
ETFs that track slightly more exotic stocks or bonds that could pose liquidity concerns. And ETFs that can frequently trade at a premium or discount to the value of their underlying assets, such as emerging markets and junk bond ETFs, go here.
Specialized products that involve otherwise particularly tricky markets or tax consequences -- China, master-limited partnerships, mortgage REITs, currency- and interest-rate hedged ETFs and alternative strategies -- get a PG-13.
Not suitable for retail investors. Any ETF that predominately holds derivatives such as swaps or futures. This includes all leveraged and inverse ETFs plus all single-commodity ETFs that hold futures contracts.
Non-leveraged exchange-traded notes and volatility (VIX) products also fall in here. If a bitcoin ETF comes out, it would land here.
Any leveraged ETN, in which investors get the double dose of leverage and credit risk. These are those rare products that make -- or should make -- even professional investors think twice.
Example: VelocityShares Daily 2x VIX Short-Term ETN (TVIX)
More from Bloomberg
VIDEO ON MSN MONEY
which can be passed by our do-nothing, handouter CONgressPerps.
When our Corporate shilling CapitAL Hillstreeters become confused,
and believe me, a rating system is beyond even their cognitive efforts,
there will be little incentive to have such gateway warning measures
written into the books.....Unless you attach many Benjamins.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
[BRIEFING.COM] Equity indices closed out the month of August on a modestly higher note. The Russell 2000 (+0.6%) and Nasdaq Composite (+0.5%) finished ahead of the S&P 500 (+0.3%), which extended its August gain to 3.8%. Blue chips lagged with the Dow Jones Industrial Average (+0.1%) spending the bulk of the session in the red.
The final week of August represented one of the quietest stretches for the stock market so far this year. The first four sessions of the week produced the ... More
More Market News
|There’s a problem getting this information right now. Please try again later.|
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'