Last Updated: 13 September 2023
Paul—your blog is reassuring in difficult times, but there ARE still issues to be worried about.
If there is one thing that is crystal clear as we continue to hold our stomachs in the current environment, it is that we are in no way out of the woods of the current crisis yet. How the Obama administration handles the crisis and stays on the issues will be one big determinant of the macro picture. Based on some of the fearful equity movement we continue to see, and continued tight credit markets, there is still every reason to be nervous about the macroeconomic picture.
How this translates to ETFs, ETPs, ETCs, etc., is another matter.
You’ve done a good job in outlining the issues with current products. With “old school” ETFs, there are very limited credit issues (though of course the equity value of your underlying holdings could evaporate to near nothing if markets continue to plummet). With “pure” ETFs, the credit issue is more or less limited to stock-lending. And the risk there is limited, and closely controlled through fully collateralized share lending. With the in specie products so common in Europe, Paul has done a good job outlining the credit risks (which max out at 10% of the fund value and amount to more or less the market change in any given day). Even with ETNs and ETCs, the picture is not quite as clear, as some of those products are now collateralized (though with exactly what is a good question).
So overall, the picture is pretty reassuring in the ETF business, and that is a part of the reason why ETFs have in the past gained so much ground in uncertain times. In scandal and crisis, investors tend to move toward greater transparency and better cost efficiency. The complicating factor is that there is a wide array of exchange-traded products now that are to a degree confusing investors, who may stay away from the entire category amidst fears about a relatively limited group of the products.
For example, the longer-term tracking issues and tax problems of some of the leveraged and inverse products, as well as the default of the Lehman ETNs, had one advisor stand up at our recent conference in Florida and ask, “With all of these risks, why should I even bother looking at ETFs?” I think it’s important that the ETF industry not lose sight of that. The industry and we need to do a better job of differentiating products and making it clear that the bulk of the products out there have a structure that is EXACTLY what you want in crisis: full transparency, low cost and good tax efficiency.
As a side note on the stunning recent continued falls in bank shares … I continue to be dumbfounded. It’s like an ugly monster that continues to feed on itself, and we continue to watch banks and the financial sector closely. I’ve said it before and I’ll say it again … we very well may not be at the end of this. As an area of interest, even as his parent company struggles, BarCap Head of Research Larry Kantor has some advice for the Obama administration. Then Goldman Sachs Chief Economist Jim O’Neill follows with his own thoughts … some nice video.