Comments on: ETFs aren’t derivatives http://blogs.reuters.com/felix-salmon/2010/10/01/etfs-arent-derivatives/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: deblythe http://blogs.reuters.com/felix-salmon/2010/10/01/etfs-arent-derivatives/comment-page-1/#comment-20554 Tue, 09 Nov 2010 20:27:05 +0000 http://blogs.reuters.com/felix-salmon/?p=5609#comment-20554 So. ETFs for Dummies….which ones are considered scarey?? There must be some that are secured with real commodities, e.g. SGOL

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By: mutant_dog http://blogs.reuters.com/felix-salmon/2010/10/01/etfs-arent-derivatives/comment-page-1/#comment-19017 Mon, 04 Oct 2010 14:45:53 +0000 http://blogs.reuters.com/felix-salmon/?p=5609#comment-19017 The principal functional difference between the e-mini and SPY methods of speculating on that index is leverage. That is the important distinction to make.

Some ETFs are derivative-like, some are not. Some ETFs are structurally doomed (UNG comes to mind); some are comparable to mutual funds (SPY, e.g.). They are difficult to generalize, functionally.

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By: Nick_Gogerty http://blogs.reuters.com/felix-salmon/2010/10/01/etfs-arent-derivatives/comment-page-1/#comment-19014 Mon, 04 Oct 2010 13:37:37 +0000 http://blogs.reuters.com/felix-salmon/?p=5609#comment-19014 Actually many ETF’s may not hold the underlying equities, but provide equivelant returns versus a note or OTC contract. Most ETF’s refuse to disclose the counterparties of these notes. They are in effect daily swaps derived from the value of indexes or baskets. These are most common in 2 and 3X products which leads to their long term tracking errors as they are settled daily and suffer from the ETF decay issues induced by Siegels paradox.

One could argue the notional principal isn’t at risk as it isn’t swapped, but counterparty risk on the daily settlment is at risk. The notional values underlying the ETN instrument based derivatives may never actually trade, thus making the variance a derived value swap.

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By: Publius http://blogs.reuters.com/felix-salmon/2010/10/01/etfs-arent-derivatives/comment-page-1/#comment-19008 Mon, 04 Oct 2010 02:06:43 +0000 http://blogs.reuters.com/felix-salmon/?p=5609#comment-19008 This has been debated in the commodity realm for a long time, when Live Cattle became cash-settled. By your definition, Felix, cash-settled futures are derivative, because they do not represent a claim on a real asset. Physical settlement would not be a derivative, because you can alway take delivery of Pork Bellies.

But as several commenters above sense, this is a distinction without a difference. What matters is the nature of the underlying instrument. Otherwise you end up saying nonsensical things like, Bond Futures aren’t derivatives, because you can take delivery of the bonds, but Eurodollar futures are, because they are “side bets” (cash-settled)

If the underlying market is valid and liquid, the derivative should be meaningful, if volume in the two markets is balanced. But if there is a massive disparity in size or liquidity, as it is in the market for cash-based muni debt and the muni CDS market (to pick an egregious example), you end up with one or the other market being a video game for hedgies.

And if policy errors result from bad price signals, don’t say you weren’t warned.

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By: jmalicki http://blogs.reuters.com/felix-salmon/2010/10/01/etfs-arent-derivatives/comment-page-1/#comment-18995 Sat, 02 Oct 2010 19:55:11 +0000 http://blogs.reuters.com/felix-salmon/?p=5609#comment-18995 “If all of the world’s E-Mini contracts were to become vaporized tomorrow, by contrast, then the effect on the S&P 500 would be de minimis. E-Mini contracts are side bets on the S&P 500: they’re not real-world claims on it.”

Why do so many believe this? E-minis and SPY converge in price because they are near-perfect substitutes as investment vehicles. The only difference is that E-minis are discounted due to not receiving dividends. They’re very close substitutes, and economics tells us that prices and quantity of substitutes cause changes in the prices of each other.

If I want to bet the S&P 500 will go down, I have two options – either short SPY, or short E-minis. If E-minis go away, I will be more likely, and pay more in fees, to short SPY, causing the price of SPY to go down.

Likewise, if I want to bet that the S&P 500 go up, I have two options – buy E-minis, or buy SPY. If E-minis go away, I will be willing to pay higher fees to get SPY instead, and cause its price to go up.

In other words, if I own long E-minis, I have real wealth – I have claims on hedge funds who have bought SPY and shorted E-minis in order to bring their prices in line.

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By: Mr.Do http://blogs.reuters.com/felix-salmon/2010/10/01/etfs-arent-derivatives/comment-page-1/#comment-18994 Sat, 02 Oct 2010 19:52:21 +0000 http://blogs.reuters.com/felix-salmon/?p=5609#comment-18994 I see the distinction Felix is making, but it seems a little nitty. Is there any difference between SPY leading to more speculation and S&P500 futures doing the same thing?

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By: ottorock http://blogs.reuters.com/felix-salmon/2010/10/01/etfs-arent-derivatives/comment-page-1/#comment-18987 Sat, 02 Oct 2010 15:53:50 +0000 http://blogs.reuters.com/felix-salmon/?p=5609#comment-18987 Felix right, Greenberg wrong, end of story. Quite frankly I’m surprised it’s even an issue for debate.

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By: takloo http://blogs.reuters.com/felix-salmon/2010/10/01/etfs-arent-derivatives/comment-page-1/#comment-18983 Sat, 02 Oct 2010 12:45:25 +0000 http://blogs.reuters.com/felix-salmon/?p=5609#comment-18983 by that Greenberg’s logic even mutual funds are derivatives!

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By: IbexSalad http://blogs.reuters.com/felix-salmon/2010/10/01/etfs-arent-derivatives/comment-page-1/#comment-18980 Sat, 02 Oct 2010 08:07:14 +0000 http://blogs.reuters.com/felix-salmon/?p=5609#comment-18980 Your claim may be specifically true with respect to SPY, but to make the blanket claim that ETFs are not derivatives is dangerously misleading. Somewhere around half of all AUM in ETFs in Europe is via synthetic replications – derivatives with no claim on the asset. And yes, they are sold as ETFs.

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By: johnhhaskell http://blogs.reuters.com/felix-salmon/2010/10/01/etfs-arent-derivatives/comment-page-1/#comment-18977 Sat, 02 Oct 2010 06:43:18 +0000 http://blogs.reuters.com/felix-salmon/?p=5609#comment-18977 MarkWolfinger- I was with you when you said a derivative is something whose VALUE is derived from the value of another asset (such as a basket of S&P stocks)

I lost you when you said that an ETF whose VALUE is derived from the VALUE of the S&P basket was not a derivative though… because it’s “essentially a mutual fund”? That means it can’t be a derivative I guess… well okay then.

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