FSB Is Worried About ETFs—Should You Be Concerned Too?

[Turbineguy]

Exchange traded funds pose a serious risk of causing a new financial crisis and should be put under the spotlight so that the signs of a market crash are spotted early, according to the Financial Stability Board.

In particular, the FSB said it was worried that ETFs could exacerbate the impact of a future crisis as many funds are not fully-backed by the asset they are invested in.

While early ETFs were backed entirely by whatever asset they were invested in, newer funds have been created which use derivatives to mirror the performance of the actual asset.

Developments such as these are at the heart of concerns about what would happen in the event there was ever a run on the market.

“There is a risk that investors massively demand redemption,” said the FSB.

Many suspect that ETFs are at least partially responsible for many of the asset bubbles that have sprung up around the world, pumping up the price of commodities ranging from coffee to lean hog meat.

Gold ETFs are one of the largest fund types, with the largest holding reserves worth more than $30bn.

http://www.theetfbully.com/2011/04/fsb-is-worried-about-etfs%E2%80%94should-you-be-concerned-too/

[dkf]

1. There are also more futures contracts than the underlying assets.

And that is why the ETFs can represent more gold than is sellable.

Also ETNs which use the credit of the issuer...

[Turbineguy]

6. It would seem in the case

of leveraged ETF's as redemptions increase the significance of the leverage increases since redemptions result in real money flowing out. If a gold ETF had redemptions it would have to buy more gold to compensate, ironically pushing up the gold price and thereby the ETF per share price. Somebody selling the ETF would see the price rise afterwards and think they had done the wrong thing.

[SheilaT]

2. It sounds like just another version

of the derivatives that were at the heart of the financial meltdown. These things should no be allowed. All they're good for is creating huge wealth for a small number of people while producing nothing of value whatsoever, and then when the bubble bursts it's the little guys who are hurt.

[Curmudgeoness]

3. Take one shell game out of the picture, and Wall St will develop another

shell game. I am deeply concerned with ETFs and what appears to be a lack of transparency with them.

[AtheistCrusader]

4. Frankly, I can't believe it hasn't popped already.

Paper notes for gold futures? We learn nothing.

[upi402]

5. Don't commodity ETF's have to be churned 5 times a year?

So many say commodities will go up here, because the US can't print more of it at eill. But how can you play that if true when I hear they are dumped 5x a year?