The Financial Industry Regulatory Authority (FINRA) recently issued a report outlining is its regulatory and examination priorities for 2012. The securities industry regulator is focusing on conduct and products meant to beat the market that are unsuitable investments for many investors.
U.S. investors have poured money into single-country exchange traded funds with encouragement from Wall Street, but that can be a dangerous strategy. Such a strategy often leads to dangerous over concentrations, which, like leverage, can amplify both gains and losses. (See SmartMoney Magazine, “Wilting ETF Returns”).
Continue reading "Currency Risk Haunts Single-Country Exchange Traded Funds (ETFs)" »
Given the array of exotic alternative investments being sold to the public, it’s logical that many investors often don’t understand what they are buying. What is even scarier is that it is likely their professional investment adviser doesn’t understand the alternative investment either. Investment advisers – 75 percent of them – admit they do not understand alternative investments. Notwithstanding their puzzlement, 50 percent of advisers said they intend to increase their use of them in their clients’ accounts this year. They could use some help, however, because of alternative investments are so confusing. (“Alternatives spur anxiety,” InvestmentNews).
While exchange traded funds continue to flood the market, a record number of existing ETFs are failing or in trouble. Last year, 308 new exchange traded funds were launched, but almost 90 percent of them were unable to attract the $30 million regarded as a minimum threshold amount for profitability, according to CNNMoney (See “Is the ETF bubble about to burst?”), citing XTF, a firm that researches and advises exchange traded funds globally.
Continue reading "20% of Existing Exchange Traded Funds (ETFs) on 'Death Watch' List" »
Junk bond exchange traded funds have ten times more money than they did two years ago, and are causing some of the largest price swings ever. Junk bond price swings were seven times higher in November than in May. This volatility in the junk bond market is similar to the volatility seen in other asset classes caused by exchange traded funds. (See Bloomberg “Exchange Traded Junk Funds Roil Bond Market”).
Continue reading "ETFs Increase Volatility in the Junk Bond Market" »
Is owning index funds a good idea? It depends on the index, according to personal finance expert John Waggoner (“Funds following odd index? Just say no”). Broad based index funds are a good idea, but new exotic niche funds are not.
Continue reading "Index Funds Can Carry Considerable Risk" »
It’s getting crazy out there in ETF land. Leveraged exchange traded funds like Direxion Funds that deliver two times the return of a benchmark are being jacked up to three times the return. Many market observers believe that the highly leveraged exchange traded funds are contributing to the market volatility that is causing investors to flee the stock market. (“Beware of ETFs On Steroids,” Bloomberg Business Week, Markets & Finance).
Continue reading "Some Exchange Traded Funds (ETFs) Are Morphing Into Monsters" »
Thinly sliced niche exchange traded funds provide exposure to arcane parts of the market, but they may not be what investors had in mind when they purchased them. (“Thinner and Thinner: ETF Providers Cut Market Into Ever-Narrower Slices,” Wall Street Journal).
Continue reading "Exotic ETFs Become Riskier and Riskier" »
Laurence D. Fink, chief executive officer of BlackRock Inc., blasted sellers of synthetic (derivatives-based) exchange traded funds as damaging to the industry, according to InvestmentNews (“BlackRock’s general, Societe Generale in ETF ‘street brawl’”). BlackRock is the world's largest ETF provider and one of the world’s largest money managers.
Continue reading "Are Certain ETFs Socially Irresponsible?" »
When world markets move significantly in apparent response to major macroeconomic news, even supposedly “uncorrelated assets” move in unison with them, according to Jason Zweig’s Wall Street Journal article, “Caging Raging Contagion.” Such a significant move occurred last week when the Italian government and bonds collapsed over its fiscal problems, and everything else fell, too.
Continue reading "High Correlations Among Asset Classes Means There's No Place To Hide" »
Investors in Europe withdrew $1.9 billion from synthetic (i.e., derivative-based) exchange-traded funds last month, according to Bloomberg (“Synthetic ETFs Lose $1.9B in Europe”). On the other hand, physically backed funds had inflows $3.11 billion.
Continue reading "Investors Flee From Synthetic ETFs" »
As recently reported by InvestmentNews, The Securities and Exchange Commission (“SEC”) and the North American Securities Administrators Association, Inc. (“NASAA”) jointly issued an investor alert warning about risks associated with self-directed IRAs. These IRAs differ from traditional IRAs in that they allow owners to invest their retirement savings in a number of unusual and sometimes risky investment vehicles, including real estate, life settlements, limited partnerships and private placements.
Continue reading "Risky Investments Flood Self Directed IRAs" »
The Securities and Exchange Commission has launched a general review of exchange trade funds, including the adequacy of disclosures made to investors. The U.S. Senate also held hearings last week examining exchange traded funds. These come amidst growing concerns that exchange traded funds are generating 35-40% of the exchange trading volume and playing a significant role in the extreme volatility of the stock market.
Continue reading "Are Exotic Exchange Traded Funds New Weapons of Mass Destruction?" »
Many investors in alternative investments are in for unpleasant surprises. Alternative investments are very popular these days, as traditional stock and bond investments are not doing well. Alternative Investments include a wide variety of investments that fall outside the traditional stock and bond categories. Examples include structured products (such as principal protected notes and reverse convertibles); hedge funds; private equity; nontraded REITs; niche, leveraged, inverse leveraged, and synthetic exchange traded funds; and many others.
Continue reading "Alternative Investments - High Risk 'Pigs in a Poke'" »
The Securities and Exchange Commission is expanding its investigation into the use of derivatives by mutual funds and exchange trade funds, and will also focus on problems related to disclosures, valuations, transparency, market volatility, liquidity and other systemic risks associated with exchange traded funds, particularly "leveraged" funds that amplify investor bets often through the use of derivatives. See the Wall Street Journal (“SEC Reviewing Effects of ETFs on Volatility,” Andrew Ackerman).
Continue reading "SEC Expands Investigation into Exchange Traded Funds (ETFs)" »
A U.S. Senate banking subcommittee is starting hearings today on the structure and market impact of exchange traded funds. As referenced in the Wall Street Journal article, “ETFs on the Hot Seat,” they are intensely controversial alternative investments. This is especially true of the high-risk synthetic, leveraged and niche exchange traded funds that have proliferated in recent years. These securities have increased market volatility and portfolio risk for many unsuspecting investors.
Continue reading "Congress Studying Risks and Dangers of Exchange Traded Funds (ETFs)" »
Many investors have reason to support the Occupy Wall Street movement that objects to Wall Street greed. These investors have seen their hard-earned money dissipate in the hands of their “trusted financial professionals.”
Continue reading "Investors Should Be Leading The 'Occupy Wall Street' Charge" »
The world’s largest money manager, BlackRock Inc., which owns 42% of the exchange traded fund market, has issued a report calling for increased transparency and regulation concerning synthetic exchange traded funds. Synthetic exchange traded funds rely on derivatives (options and swaps) to replicate exposure to a reference asset. This practice introduces risks associated with “mis-tracking as well as counterparty risks,” Jennifer Grancio, managing director and head of BlackRock’s iShares U.S. distribution, was quoted as saying.
Continue reading "Dominant ETF Firm Expresses Concerns About Synthetic ETFs" »
Investors should use extreme caution before investing in alternative investments. Alternative investments have become the popular “investment du jour" but these investments are fraught with risks. Simply stated, alternative investments are not the panacea that so-called experts represent them to be. For the reasons discussed below, investors need to be very skeptical of any recommendation encouraging them to invest in alternative investments.
Continue reading "Most Alternative Investments Carry Huge Risks" »
Most investors are not well informed about exchange traded funds and 46% describe themselves as “novices,” according to a survey taken by Charles Schwab Corp. Yet the survey also found that 44% planned to increase their exchange traded funds investments. Let’s hope these investors avoid the numerous extreme and exotic funds out there, which add risks that most investors do not understand or want.
Continue reading "Survey - Most Investors Don't Really Understand ETFs (Exchange Traded Funds)" »
