AppId is over the quota
AppId is over the quota
By Chris Vellacott
LONDON | Thu Jan 19, 2012 10:09am GMT
LONDON (Reuters) - Exchange traded funds (ETFs) are being widely missold as a low cost form of index tracker when in fact they are highly complex vehicles best suited to hedge funds and proprietary trading desks, a leading investor said.
Speaking to journalists on Wednesday, Terry Smith, head of fund management company Fundsmith warned the unwary investor buying into an ETF could be exposed to highly complex opaque products more suited to high frequency traders and hedge funds.
"If you read the description of the product they use the words synthetic, derivative, swap and counterparty. If you can't figure out what the problem might be here you need to study the history of the last four years more carefully," said Smith, who is also Chief Executive of interdealer broker Tullett Prebon (TLPR.L).
By the third quarter of 2010, the global ETF sector managed $1.2 trillion (780 billion pounds) of assets, after growing at an average annual rate of 40 per cent in the past decade, data from the Financial Stability Board shows. The sector is expected to have grown by at least 5 percent in 2011, according to providers.
Smith also pointed to the fact that ETFs can be traded like shares on an exchange, a feature irrelevant to non-professional retail investors that makes the vehicles attractive to short sellers.
"The only people who want ETFs to trade intraday are bank proprietary trading desks, hedge funds and algorithmic traders. The average investor is none of the above," he said.
Smith also warned that because they are used as shorting instruments by some hedge funds, a situation can emerge where the shorting interest - the number of shares out on loan - can be many times the underlying units in issue.
Though ETFs are increasingly marketed as low cost products, he added, they are highly profitable for the banks that provide them and the charge to the investor is "a very small tip of the iceberg on what (the banks) are making".
"The bank is providing the Swap into the asset class... leverage, and they're doing all the dealing around the ETF for high frequency traders and others who deal in ETFs. There are many ways in which they are clipping the ticket of ETFs. There's basically a gravy train," he said.
(Editing by Sinead Cruise and Mike Nesbit)
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