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Doe ETF's have an achilles heel?


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I invested in an index (nikkei) ETF just before wall street came crashing down but I thought I did not mind because I am in it for the long haul and since I have an index ETF, a slice of the whole (or 200 companies of) the market, it would take a mass economic wipeout to prevent my bouncing back.


But then as Lehman went broke and Morgan was bailed out, it occured to me that the value of an ETF may only be as secure as the bank that sold it.


What happens if the investment bank goes bust? Would that mean I would loose my capital?

The fund may be diversified among 200 companies but the fund manager is only one company and a lot of investment banks seem to be in danger of going to the wall.


If so, then I am thinking of selling my crippled ETF and getting a variety of blue chips or primary industry stocks instead. Does an index ETF have an achilles heel in the investment bank that manages it?

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  • 8 years later...

Australian domiciled funds vs. CHESS Depository Interests (CDIs)


ETFs that invest in international (i.e. non-Australian) assets will generally come in one of two forms, largely indistinguishable on the surface but with quite different structures.


An Australian domiciled ETF is one that is formed, registered and regulated in Australia, is resident in Australia for tax purposes, and whose 'home' exchange is the ASX.


The alternative structure for international ETFs trading on the ASX is through a CHESS Depository Interest (CDI) in an already established offshore fund. In the case of ASX traded ETFs, all CDIs currently available are for funds based in the US. A CDI is a financial product quoted on the ASX which confers a beneficial interest in the underlying financial product to which it relates. A CDI will generally be listed by a global fund manager with an Australian presence and, though quoted on the ASX, it is actually a 'cross-listing' of the US fund.


Buying an interest in a fund that is domiciled in the US, for example, and cross-listed in Australia, presents certain considerations for investors:Foreign governance: Offshore funds are governed primarily by the laws of the country of their original listing, not Australian law.

  • Additional administration: Because each CDI is an interest in the offshore fund, CDI holders are required to submit a W8-BEN form to the fund if they wish to reduce their withholdings tax (e.g. from 30% to 15% under the Australia-US double tax treaty). This is not a one-off and requires periodic updating.
  • Legal implications: Being governed primarily by foreign law, investors in offshore funds may have to contend with legislation that does not exist in Australia, such as potential US Estate Taxes for US domiciled investments.
  • Extra layer of withholdings tax ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ generally, an Australian resident holding a CDI on a US listed global exposure is subject to potential withholdings tax twice, ie from the foreign companies into the US and then into Australia.
By contrast, an investor in an Australian domiciled fund does not need to fill out individual W8-BEN forms because they are filled out once at the fund level, by the fund manager. Also, being governed primarily by Australian law, there are minimal, if any, direct foreign law impacts for investors. The investor is only subject to withholdings tax once on a global exposure ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ on the distributions from the foreign companies into Australia.
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Liquidity question haunts ETFs


by The Lex Column

Exchange traded funds are far from being the elephant in the room. Rather than ignoring these ever more popular securities, the Securities and Exchange Commission is reportedly preparing to launch an in-depth review of them. Given their growing importance, this is welcome.


A big worry is that liquidity in ETFs is deceptive, especially when a fund tracks less liquid assets, such as bonds or emerging markets stocks. So-called authorised participants (often investment banks) try to match buyers of ETFs with sellers in the secondary market.


In the absence of a match they can ask the ETF provider to issue new shares in exchange for a basket of the (less liquid) underlying securities ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ or take units back in return for assets. The existence of these market makers is what enables ETFs to offer live pricing, and should ensure liquidity.


A run on an open-ended mutual fund can also cause big dislocations in the securities it owns, since it must sell assets in order to repay investors. Witness the closure of a high-yield US bond fund in 2015, or recent problems at British commercial property funds. A closed-end fund does not sell assets, but its share price can diverge significantly from the value of its holdings. In this sense, ETF liquidity is arguably better than either.


ETF assets under management have grown almost 20 per cent per year, and stand at $US3.3 trillion ($A4.3 trillion) globally. No end is in sight to this expansion. With figures so big the details matter. The SEC has limited the use of leverage and strengthened minimum cash requirements. More such rules will help, not hinder, the market's growth.

Financial Times
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  • 5 months later...

provided for EB when he said, elsewhere, ....i thought one need much more work to understand macro economic to play index and major weighing stocks movement... http://www.sharescene.com/style_emoticons/default/unsure.gif not sure it is a good idea for people to "invest in index"

the case for a qualitative overlay on indices built with quantitative inputs received a boost from Hong Kong last week when the governance shortcomings of Huishan Dairy were revealed.


On Tuesday, the Chinese company, whose shares inexplicably plummeted 90 per cent (in just an hour) a few days before, confirmed it was in financial difficulty. The milk group also said most of its largest investor's shares had been pledged for loans. Trading was halted days before the news came out.


End investors will unwittingly hold the stock through tracker funds. Huishan is a constituent of the MSCI Asia Pacific index. Holders include BlackRock, Vanguard and Invesco, according to Bloomberg data. Worse, Huishan is also in the MSCI Emerging Markets ESG (environmental, social and governance) index. That looks odd, given the rumours circulating about executives. A March 2015 report from MSCI ESG Research highlighted aggressive accounting practices.


MSCI is not the only index provider to have fallen foul of strange dealing. Hanergy Thin Film Power, whose stratospheric share price rise briefly made major shareholder Li Hejun China's richest man, is a constituent of FTSE indices. Suspension since May 2015, after the stock halved in half an hour, means a similar clutch of tracker providers still hold untradeable shares....

The Lex Column - Financial Times
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  • 1 month later...

Bogle Says If Everybody Indexed, Markets Would Fail

"If everybody indexed, the only word you could use is chaos, catastrophe," Jack Bogle, the founder of Vanguard Group, said in an interview with Yahoo! Finance on Saturday. "There would be no trading, there would be no way to convert a stream of income into a pile of capital or a pile of capital into a stream of income. The markets would fail."


.... Passive equity investments may become as much as 45 percent of the mutual fund industry within five years as investors move to low-cost funds, Bogle said in an interview on Bloomberg Radio in March. It's now between 20 percent and 40 percent, Bogle said on Saturday, and could reach 75 percent without posing a significant market risk.


He distinguished ETFs from other funds that track the indexes, saying that investors in those products don't maintain the same "buy and hold" mentality.

well... der
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  • 1 month later...

on the same theme (of investors moving to low cost ETFs)

...........A market that is just systematic (non-diversifiable) risk is impossible to trade. You can be risk-on (long stocks), or risk-off (short stocks), but there are virtually no benefits to diversification.


Look at S&P 500 index funds. In the old days, you would say you were diversified if you owned an index fund ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâہ¡ÃƒÆ’‚ÂÂyou owned 500 stocks!


Does anybody really think that they are diversified by owning an index fund today?


No. You own the same 500 stocks that everyone else owns. Again, there is nothing left but systematic risk.......

from The Everything Bubble by Jared Dillian
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  • 1 month later...

A new ETF likely to attract fund flows will be a fund focused on the world of robotics, automation and artificial intelligence.

The robotics industry, which had an estimated value of $64 billion in 2015, is expected to be worth as much as $1.2 trillion in 2025. It will be pitched as an inexpensive and fully diversified option over a growing mega trend.


Unlike Magellan, which has selectively invested in these themes across household names like Google, Apple, Alphabet, Microsoft and Facebook ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ ETF Securities will look for emerging names in the sector. The fund will target earnings per share growth that is at least twice that of the S&P 500.


The fund is expected to have as many as 80 constituents with 20 companies accounting for 2 per cent each and the remaining 60 companies accounting for 1 per cent each for the purposes of diversification and the higher risk nature of the investments.


The investment universe is less intuitive that its companion fund (an Infrastructure ETF) and will involve companies selected by a panel and then put through a quantitative screen which will take into account the company's home exchange, trading volumes and market capitalisation. Constituents will be required to generate a material proportion of earnings from either robotics, automation or artificial intelligence.

we shall see
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  • 1 month later...
BetaShares is poised to launch a hybrid security investment vehicle following its .. cash and fixed interest offerings.


BetaShares has appointed Coolabah Capital Investments under an institutional mandate to operate the actively managed vehicle that looks to reduce the risks involved in holding the popular half-debt, half equity instruments according to BetaShares managing director Alex Vynokur.


"Hybrids are significantly less risky than equity but they are much more risky than bank deposits for example. What we are bringing to the table is an actively managed solution that will help an investor diversify and minimise downside risk," Mr Vynokur said.


The fund will also allow investors with significant hybrid holdings to make in-specie transfers into the fund in order to minimise the tax implications and will consider acquiring hybrid holdings of more than $500,000.


There are more than $50 billion of hybrid securities on issue in Australia with the vast bulk of them purchased by retail investors and SMSFs who are attracted to the higher rates of income they offer. Around 80 per cent of these securities have been issued by the banks.


The new fund will round out BetaShares' suite of popular fixed-income offerings that include the High Interest Cash ETF (AAA), which has attracted $1.27 billion in investor in just five years. The firm's newly launched senior floating rate note ETF (QPON) has attracted $100 million in flows in the first three months.


BetaShares says that hybrids are an attractive if tricky asset. They are about five times less volatile than equities but about six times more volatile than floating rate notes.


The fund will pay monthly franked income and charge 45 basis points per annum plus cost recovery to a maximum of 10 basis points. It will also charge a performance fee equal to 15 per cent of outperformance subject to a high watermark.


BetaShares says the manager will have the ability to roam across the capital structure and move into subordinated debt, senior debt and cash when appropriate. It will have the flexibility to move into 100 per cent cash.


The firm believes that self-directed investors who have been compelled to buy hybrids but are unable to manage a portfolio will be attracted by the offer.


"Hybrids can be complex instruments. Some of them have non-viability clauses and capital triggers. It's an asset class that really lends itself to asset management," Mr Vynokur.

plus brokerage... getting expensive. In my view, they then take risks, (manager discretion) to bump up the yield!
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Many investors stick with hybrids accepting the risks because of a deep seated faith in AustraliaÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s big four listed banks. Though there is little sign those banks will hit the rocks in the years ahead ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâہ¡ÃƒÆ’‚ or at least fail so poorly that they would not honour their hybrid commitments ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâہ¡ÃƒÆ’‚ it is also true that conditions are deteriorating for the majors....


The conundrum for most private investors is that government bonds often offer lower returns than cash, corporate bonds are more lucrative but very few people have the time or money to construct portfolios in this area as most corporate bonds are sold with a $50,000 minimum.


ETFs on the other hand can offer that most elusive criteria ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâہ¡ÃƒÆ’‚ a diversified holding in true fixed income. If there is a flaw in the argument itÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s that bond ETFs being listed on the ASX means they can be sold off easily should investors see reason to panic ... and thatÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s just what tends to happen.

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  • 4 weeks later...

The stock market's robot revolution is here

the long-awaited rise of the machines is here, at least in the stock market.


A new artificial intelligence-powered exchange-traded fund launched on October 18. Called the AI Powered Equity ETF (ticker: AIEQ), it uses IBM's Watson supercomputing technology to analyze more data than humanly possible, all in the pursuit of building the perfect portfolio of 30 to 70 stocks.


The ETF ranks investments based on their "probability of benefiting from current economic conditions, trends, and world- and company-specific events" and picks those with the best chance at outperformance, according to a recent release.


And the technology enables it to do that while constantly analyzing information for 6,000 US-listed companies

- no longer an Achilles heel, but bringing the market to heel?

So what sets AIEQ apart? Chida Khatua, CEO and co-founder of EquBot, argues that their technology is more advanced, which gives it a big advantage.


"As powerful as many algorithms underlying expensive quantitative hedge funds and other vehicles might be, unless they're also built with AI and machine learning baked right in, mistakes can be propogated and opportunities for outperformance can be missed," he said..

or something. Until the next one. ... I'd rather be roughly right than exactly wrong
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