Exchange Traded Funds (ETF)

[mojo_]

Shades of Lehman mini-bonds?

The problem with commodity ETFs

(be careful with ETFs)

PS: have moved this over from "commodities" to keep it all together

[kennynah]

i am lesser worried about ETFs issued by respectable institutions. if ever there's a gap between the actual value of the ETF and the underlyings that it encompasses, it will be an arbitrage opportunity and that will close up in a very short time. therefore, imo, ETFs have no room for mis-valuation.

Just like CFDs and warrants, will we end up having to transact with the issuer/marketmaker most of the time and being at their mercy with wide bid/ask spreads?

Also how to ensure the ETF tracks closely the investment we are targeting?

Airtime: Tues. Jun. 23 2009 | 10:35 PM ET

The popularity of ETFs has exploded since their debut in 1993, but can some ETFs do more harm than good to a retail investor's portfolio? Tom Lydon, editor of ETFtrends.com, and CNBC's Bob Pisani discuss.

ETFs: Too Powerful?

[OE2008]

I have given up with ETFs which were listed years ago on STI. Will have to re-appraise some of the latest ETFs. Unless there is enough liquidity and narrow spread, I am inclined to place my bets in my US broking account.

Costs of transaction are low. However, I also do not like maintaining too large an account in a US broking account. Beside currency risk, it can go bust. Refco was one. Now Etrade is shaky; the broking arm is okay but not the banking business. Must have ingested toxic waste like many others.

[mojo_]

Thanks K... but if the underlying is not a straightforward index... instead something like double inverse index (whatever that means)... or some basket of commodities, how easy is it to calculate the underlying?

I read somewhere recently there were 2 well known oil ETFS that went nowhere while the price of oil has shot up over the past months...

[kennynah]

if the ETF does not clearly indicate the underlyings...then one should avoid it for sure..

then again, i dont understand why anyone would buy Index ETF if there's a Index futures to be traded... some more i understand there's some fees to be paid to those ETFs??

anyways...better always to purchase ETFs created by existing "branded" insitutions like Barclay's, Proshares, etc... they;ve been around for sometime...

next, just like stocks, always hit on highly liquid ETFs.... else the spread can be as wide as the Pacific ocean.... once enter already lose couple of points.... what for...

[mojo_]

Regulatory Notice 09-31

FINRA Reminds Firms of Sales Practice Obligations Relating to Leveraged and Inverse Exchange-Traded Funds

Executive Summary

Exchange-traded funds (ETFs) that offer leverage or that are designed to perform inversely to the index or benchmark they track—or both—are growing in number and popularity. While such products may be useful in some sophisticated trading strategies, they are highly complex financial instruments that are typically designed to achieve their stated objectives on a daily basis. Due to the effects of compounding, their performance over longer periods of time can differ significantly from their stated daily objective. Therefore, inverse and leveraged ETFs that are reset daily typically are unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets.

This Notice reminds firms of their sales practice obligations in connection with leveraged and inverse ETFs. In particular, recommendations to customers must be suitable and based on a full understanding of the terms and features of the product recommended; sales materials related to leveraged and inverse ETFs must be fair and accurate; and firms must have adequate supervisory procedures in place to ensure that these obligations are met.

Questions concerning this Notice should be directed to the Office of Emerging Regulatory Issues at (202) 728-8472.

[LenaHuat]

This exchange of views here are really helpful to me. I'm sure there are counterparty risks in ETFs.
The idea of ETFs could have started on good faith but as they proliferate, they could well turn toxic as our recent financial experiences showed us.

The key, I suppose, is to be those early swallows who catch the early summer. After all, the skies do eventually darken.

[kennynah]

L : you are right..

afterall, i suppose they need to declare their composition only periodically...what happens in between reporting dates, who knows what's in their etf composition...

actually, we can almost find alternative trades to ETFs...eg...index futures for index etfs... i suppose the inverse etfs are good for people who are risk aversed about going naked shorts...

[winston]

The Hidden Risks of ETFs By Shah Gilani, Money Morning

ETFs have a dark side, too – involving risks that most investors probably weren’t aware of, but that government regulators are now investigating. Investors need to understand those risks, and make their future ETF-related investment choices accordingly.
The government inquiry could bring a lot of those risks to light.

http://www.moneymorning.com/2009/08/07/etf-investing/

[sidney]

So far, the advantage is if you no choice have little money to invest directly into DBS STI ETF & ABF Singapore Bond Index fund and yet wants to diversify.. then ok lor..