ETFs: what you need to know about counterparty risk

But a 'physical' ETF such as ETFS Physical Metals (PHPM) should be sfae as they hold the Physical Metal as I understand it.

There is a nuance on the swap risk as described for the synthetic ETF.

The bank could take all the ETF's cash and return it as required, plus the profit or less the loss on the index. In this case the ETF could lose all its money if the bank went broke.

Alternatively the swap and the physical deposit of cash could be separate transactions, with the ETF and the bank making regular payments to each other under the swap, according to how the index was performing. The cash would then be invested separately by the ETF in accordance with its risk policy.

David - Do you seriously think a "physical" ETF holds physical metals to the same value as the investors' funds? Where do they store them?

Don't invest in anything you don't understand.

I fully admit I don't understand ETFs. That's why I'm not going anywhere near them.

I remain unconvinced of the utility of ETFs, at least for UK taxpayers. For those willing to speculate on the basis of some market or sectoral view, spread betting, being free of capital gains tax, seems to make a lot more sense, providing that it is done with adequate stop/loss precautions.

I remember my car insurance terminating abruptly as the company wen bust (much of their business was insuring schools and unfortunately the little stinkers delighted in setting them ablaze).

If u own real shares or a fund of real shares, even though the companies themselves may undergo hard times or some go bust, u should never the less hold something of value which may bounce back.

There have been other examples of investors being left up the creek eg with pensions

Guess it is best to be not too far removed from real assets and not dependent upon the longevity of particular firm or its promises.

The BO of E are fine ones to criticise though, as they continue to print money and let inflation rise through not adjusting interest rates.

Has someone only just listened to BBC File on Four. 'Business Us Usual' 5th July 2011.

If not it is here:-

http://downloads.bbc.co.uk/podcasts/radio4/fileon4/fileon4_20110705-2045a.mp3

Happy listening folks and fasten your seat belt for the financial next debacle.

Does anyone here have a link to a list of ETF's showing whether they are synthetic or physical?

Cheers

Surely you must have noticed the small print on a funds spec sheet. "May use market instruments as deemed necessary" ( Not the exact words) but you surely understand that all the fund managers 'play' with your money, some with success for you some for themselves.

I hold ETFS Agriculture (AIGA), Grains (AIGG), Energy (AIGE) and Crude Oil (CRUD) and had read that you should check funds were UCITS 3 registered. How much protection does UCITS 3? The fact sheet on these funds says "UCITS 3 Eligible investments", is this the same as registered? I would welcome comment on how safe these are and any preferred alternatives. All advice much appreciated

Re: Jeremy Fryman.

Yes, I know about market instruments/derivatives etc but looking for a link to a list of Physical ETF's rather than studying each and every fund's small print.

Yes I know about market instruments/derivatives but I am just looking for a link to a list of Physical ETF's rather than trawl through the small print in hundreds of fund's spec sheets

Repeated comment due to lost internet connection

Does anyone realizes that the risk of an ETF, even synthetic from Deutsche Bank is actually *LOWER* than keeping the money in your bank account ? Deposits are insured only up to 100,000 Euro in Europe. IF Deutsche Bank becomes insolvent the whole Germany will be wiped out as their liabilities are 7 times the German GDP.

ADDITIONALLY does anyone understand that physically replicated ETFS like ishares lend 60% or more of the holdings out and you have NO IDEA on who the counterparty is ?

Oh last but not least. Good luck with your mutual funds as the fund manager can simply make a wrong bet in derivatives (authorised for most mutual funds) and blow up the whole portfolio. But just because you don't see it it doesn't mean it is more secure... oh yeah let's wait next quarter/annual report.

At least on DB you know who the counterparty is. In a fund you don't.

Yes, I think we have all got the message about "synthetic ETFs" but could we please be told which ones are "physical ETFs"?

What about the Ishares Funds, for example, which are a popular holding?

Stock lending is commonplace in unit trusts and OEICS why is this never mentioned? How many investors who have piled money into the Blackrock UK Absolute Alpha fund have knowledge of their stock lending activities and collateral quality.

@dave duffy ishares publish their "ETF Landscape - Global Handbook" quarterly and in that lists all the ETFs available by exchange with all the relevant replication details. You may not be able to access via the internet if you are not an adviser. I am and could assit you if required.

@Bob M - these are all ETC's - Exchange Traded Contracts and as such have 100% risk to the counterparty chosen by ETFS. The collateral is revalued daily to mitigate that risk but should the chosen counterparty - UBS & Merrill Lynch feature prominently - then you would be entitled to a share of the collateral pot which is around 80% global equities and 20% cash.

@Andrew G Whiteley,

Many thanks for the details of ETF Landscape Andrew, I managed to download the 2011 Q1 copy of the handbook and it is very informative.

I assume that the synthetic ETF's are indicated by an "S" in the "approximate number of securities" column. It was a little surprising to see that leveraged ETF's only make up such a small percentage of the value traded. I risk just 5% of my portfolio on swing trades on 2 of the Triple Leveraged Direxion ETF's.

I know they are meant for day trading only due to re-balancing but they have been good for the holiday fund....

Just out of interest, is a 2011 Q2 or Q3 handbook out yet?

Thanks again

@Dave Duffy

Only Q1 available at present. If you read across the double page spread there is a "replication method" column on the facing page which details the structure behind every product.- 3x leveraged is too rich for us, best of luck with that...

We run a range of risk graded, multi-asset model portfolios for our clients using mainly ETFs www.provisio.co.uk but we have steered clear of individual Commodity bets and opted for a broad exposure via teh Lyxor CRB ETF (LCTY.LN)

Regards

Ok thanks for your help Andrew, much appreciated

It never ceases to amaze me how often our industry gets caught up with complex instruments that they believe will offer them the pot of gold at the end of the rainbow. Many professionals have lost sight of good old fashioned, long term value investing within a well diversified portfolio where we actually own (a part of) something with an intrinsic value.