Funds Hub

LIPPER: Are ETFs in trouble?

By Detlef Glow,  Head of EMEA Research at Thomson Reuters fund research firm Lipper. The views expressed are his own.

Exchange traded funds (ETFs) have found themselves under ever more scrutiny from regulators and market participants this year and expectations are that new rules for the sector are just a matter of time.

It’s tempting to think of ETFs as unwilling victims of new regulation, but to my mind, ETFs have much to gain.

The point is that it isn’t just regulators who are seeking improved transparency on fund holdings and on the use of derivatives by mutual funds, crucially it is end-investors too. And once the fog has cleared, they might come to see ETFs — with daily published portfolios and clearer statements on the use of derivatives in general — as a role model for all kinds of mutual funds.

The discussion surrounding ETFs could leave you with the feeling that they are unregulated products; that fund promoters can go wild when creating new products and with the use of derivatives in the portfolios. In reality though, ETFs follow the same local and/or international legislation of any other mutual fund; the EU UCITS regime for example.

So, why all the fuss around ETFs? In my opinion, there is nothing uniquely wrong with these products as they are using the same tools and techniques used by other funds under the UCITS regime. Some authorities, however, have raised questions as ETFs grow in popularity among professional investors. A deeper look into the questions posed shows that the points made by the critics are not only applicable to ETFs, but to any mutual fund.

CONCERN

Rude health, and a changing of the guard?

By Detlef Glow, Head of EMEA Research at Lipper. The views expressed are his own.

The European exchange-traded-fund (ETF) industry has shown some resilience in the face of questions about management practices raised by market observers like the Financial Stability Board (FSB) and regulatory bodies like the FSA in the UK.

The segment grew by 7.74 percent over the first seven month of 2011, with assets under management up by 17.20 billion euros to reach 239.37 billion.

This has come as some critics have characterised ETFs as a systemic risk for financial markets, due to the use of swaps to replicate the underlying index. Another risk that has been highlighted was the liquidity of some securities accepted as collateral to secure the positions in derivatives and for security lending strategies. Also raised was the outstanding short volume in some ETFs.

But as the ETF industry is fully regulated by market authorities and uses typical techniques for derivatives and securities-lending strategies, the risks highlighted are already known. In addition, the assets under management of the global ETF industry are still less than ten percent of the total, and the issues might be better raised with respect to all funds, instead of pointing the finger at one market segment.

Despite publicity surrounding these issues, and in contrast to the expectations of some market observers, the industry has shown a pretty normal growth pattern in terms of newly-launched funds, with 167 new products hitting the market during the first half of 2011. Most of those were equity funds (102), with commodity funds a significant minority (22).

To see details of the new ETF launches click here and here.

Short and Curlies

The Longpigs were one of the lesser lights of Britpop, best known for a number 16 hit with She Said and for launching the career of Richard Hawley. Now though, apparently, short pigs are all the rage.

News reaches us of exciting developments in the world of ETFs where the market is seeking out ways to play swine flu. ETF Securities has seen a surge in volumes and returns of its Short Lean Hogs ETC after the World Health Organisation (WHO) raised its pandemic alert for swine flu to the second highest level last Wednesday.

No word on Short Fat Hogs, but we are reliably informed that the surge in short interest in their slimline cousins has put them in the top 5 of short ETC’s by returns in the year to date. The porkers must be feeling particularly perky at outperforming the MSCI World by some 74 percent since September last year.

ETF Securities reckons the interest shows investors are using Short ETCs to benefit from an anticipated fall in demand for lean hogs on the swine flu outbreak. It notes that U.S. pork import bans have been enacted by Russia, China, the Philippines, Serbia, Kazakhstan and South Korea since the end of last week — while lean hog prices have seen sustained pressure as farmers have culled pigs, increasing supply as high feed costs and falling returns have pressured margins.  

Any Hedgies out there making this play, then get in touch.