Away with the leveraged ETFs.
On Wednesday, Dow Jones reported Morgan Stanley Smith Barney had also placed under review the sales of its leveraged and inverse exchange-traded funds “that regulators said might not be suitable for individual investors”.
This, obviously, has big implications for an industry which until recently appeared confident of further growth, largely via the ETF-isation of ever more exotic underlying assets.
The key point the current blowup demonstrates is that an important distinction should now be made within the industry which currently tends to use the ETF name as an umbrella term for all its offshoots – plain vanilla index-focused ETFs, exchange-traded-commodities (ETCs), exchanged-traded-notes (ETNs) and exchange-traded-products (ETPs).
The latter, of course, being more suited to institutional rather than retail investors.
Meanwhile, if you want to see how things can really go wrong in an ETF structure, note the following SEC filing from the United States Natural Gas Fund (UNG) released late on Wednesday, in which the fund — already forced into the bilateral market by position limits — admits it could now be forced into buying completely unrelated assets with a poorer correlation to natural gas futures.
As Olivier Jakob, an energy market analyst at Petromatrix sums up the story:
We have in the past called the ETFs on single-commodity Futures a cancer for the Futures market. From the current CFTC hearings on position limits it does seem that the main commodity investment banks are now in the process of trying to manage rather than fight the process of setting position limits in the energy markets. In order to preserve some of their core business we would think that investment banks will have to sacrifice the concept of open-ended commodity ETFs.
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On Wednesday, Dow Jones reported Morgan Stanley Smith Barney had also placed under review the sales of its leveraged and inverse exchange-traded funds “that regulators said might not be suitable for individual investors”.
This, obviously, has big implications for an industry which until recently appeared confident of further growth, largely via the ETF-isation of ever more exotic underlying assets.
The key point the current blowup demonstrates is that an important distinction should now be made within the industry which currently tends to use the ETF name as an umbrella term for all its offshoots – plain vanilla index-focused ETFs, exchange-traded-commodities (ETCs), exchanged-traded-notes (ETNs) and exchange-traded-products (ETPs).
The latter, of course, being more suited to institutional rather than retail investors.
Meanwhile, if you want to see how things can really go wrong in an ETF structure, note the following SEC filing from the United States Natural Gas Fund (UNG) released late on Wednesday, in which the fund — already forced into the bilateral market by position limits — admits it could now be forced into buying completely unrelated assets with a poorer correlation to natural gas futures.
As Olivier Jakob, an energy market analyst at Petromatrix sums up the story:
We have in the past called the ETFs on single-commodity Futures a cancer for the Futures market. From the current CFTC hearings on position limits it does seem that the main commodity investment banks are now in the process of trying to manage rather than fight the process of setting position limits in the energy markets. In order to preserve some of their core business we would think that investment banks will have to sacrifice the concept of open-ended commodity ETFs.
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