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To make it easier for investors to differentiate between direct replication ETFs and synthetic replication ETFs, representing the two broad structures of ETFs, the Exchange has arranged for the trading name of all synthetic replication ETFs to be tagged with an ‘X’, which appears next to the ‘@’ used to mark Specified Investment Products (SIPs). This improves visibility of all the synthetic replication ETFs on trading screens and the SGX live prices website.
I am glad this has finally been done as I always feel ETF is oversold in the past two years. Investors have a lot of misconceptions about what ETF is about.
ETF is merely an investment instrument, but it was marketed as a strategy by the ETF sellers. Investors are not aware that, many times, ETFs fail to deliver what they are marketed for. If investors are informed about what happened to synthetic ETFs during Japan Earthquake in March and Silver price slump in May, they should have better idea of the risks in their portfolio.
Think ETF is transparent? If I were to ask you if your ETFs are lent to hedge funds, you will most probably have no clue what I am talking about.
Terry Smith, founder of Fundsmith, wrote a blog recently, ETFs – Worse than I thought, highlighted another danger inherent in the structure of a product that combines features of an open-ended fund with those of a closed-ended product.
The fact that ETFs are tradable on the secondary market, Smith says, means there is a possibility that market participants will short ETFs themselves. The ability of ETFs to create new shares means there is no restriction on the amount of the ETF that can be shorted.
This causes a problem whereby “the assets of the ETF may become significantly less than the outstanding cumulative buy orders would suggest. This is a significant problem given reports that there has been short-selling up to levels of 1000% short in some ETFs”.
Thus, retail investors, at whom Smith says ETFs are increasingly being marketed and targeted, may find that money they believe to have been invested in exchange-traded funds have “in effect been lent to hedge funds”.
“The ETF holdings are not all backed by assets of the sort investors expect, even if they understand what the ETF is meant to do.”
While the ETF story is very hot, it is also very spicy.
CNBC : Sentiment turned quite bearish after a reports suggested that billionaire investors George Soros, as well as Carlos Slim and some other influential investors had started paring down positions in silver as well as gold.
Adding to the downward momentum, the CME again raised margin requirements
Silver Price Tumbled Source: CNBC
Interestingly, this event put another pitfall of ETF under the spotlight. One of the key problems with ETFs is that many investors believe they have bought index trackers when clearly many of them are not able to.
The following interview explains it using SLV, one of the largest physically backed silver ETF. Every ETF investor should watch this.
Does this sound familiar? But Isn’t ETF, Exchange Traded Fund, a Fund?
I am not against ETF, on contrary, I am an ETF activist.
I think this is one of the greatest innovation in financial world, which gives ordinary investors like you and me a great weapon when trying to survive in a world fully of institutional “sharks”.
However, there are many misconceptions about ETF. many pitfalls are masked by marketing campaigns from ETF providers. A car salesman will tell you how much petrol you can save a year but they will gloss over how much more the car will cost you. I will blog more about the potential pitfalls in the future.