Defaults And Credit Risk Are Very Real Issues For ETNs And ETFs

Paul – you speculate that perhaps markets are being overly pessimistic. But if you don’t think defaults are still a real possibility, you’re kidding yourself.

Paul’s blog on CDS rates here. Given the way markets are flailing at this point, perhaps losing 100% of your money in one or more of your funds isn’t much of a concern (see how easy it’s been to drop 50% or 70% of one of your fund’s assets in a year? What’s another 30% between friends?)

In this market, you would be CRAZY to think that more financial institutions … pretty much take your pick … could not go under. You bet they could, and in a hurry. XLF (Select Sector Sectors Financial) is at about $7 a share. Ten YEARS ago, it was worth 3 times that much, as the weighting of Financials has fallen off the map. And the worst may NOT be over yet.

Really, at this point, all bets are off on potential defaults. The CDS rates you show are still enough to make me nervous, and I don’t think that the appetite for credit risk in tradable products is QUITE up to where it was. It may be a while before we see the structured products market take over the world again.

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