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Gold/Mining/Energy : Big Dog's Boom Boom Room
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To: Dale Baker who wrote (156211)9/18/2011 10:59:39 AM
From: Dennis Roth  Read Replies (1) of 206184
 
OT: Tom Stevenson: ETFs have potential to become the next toxic scandal
telegraph.co.uk

ETFs are not the cheap and transparent vehicles the marketers would have us believe

...First, around half of the ETFs in Europe today do not match the index they are designed to track by holding all of its constituent shares. Unlike the plain vanilla "full replication" ETFs which do, 45pc of the market is in the form of so-called "swap-based" ETFs which instead use derivative agreements, often with investment banks, to simulate the performance of the underlying assets.

Derivative trades add a second layer of uncertainty to the unavoidable ups and downs of the market, the counterparty risk that the organisation on the other side of the contract might go bust. Even worse, the provider of the ETF might sometimes be a part of the same organisation as the derivatives desk carrying out the swap.

When a bank acts in this dual capacity, and because of inadequate disclosure rules, there is a significant potential for a conflict of interest in which the end investor comes off second best. Because there is currently no obligation for the basket of assets used as collateral to actually match the assets the ETF purports to be tracking, a bank may choose to hold less liquid assets to back the fund which it could struggle to sell if too many investors want out at the same time...
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