Exchange traded funds updates
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The bulk of the $9tn exchange traded funds industry consists of plain vanilla index trackers focused on mainstream assets. But a couple of much higher risk variants are now growing rapidly — albeit from a low base.
Cryptocurrency ETFs may still be awaiting regulatory approval in the US but they have taken off in other jurisdictions including Canada, Switzerland, Germany and Jersey. Total assets in these funds tripled from $3bn at the end of last year to $9bn as of June, according to data from ETFGI, a consultancy.
Meanwhile, the sums committed to leveraged and inverse exchange traded products — which are designed to amplify gains from market rises or conversely profit from falling asset prices — has risen from $79bn at the end of 2019 to a record $109bn, ETFGI has found.
Even the US Securities and Exchange Commission has smoothed the path for some leveraged vehicles — despite maintaining a ban on crypto ETPs. Last October, its commissioners voted by a 3-2 majority to allow ETF providers to offer products with up to 200 per cent leverage without prior approval from the regulator.
Before that decision, a consortium of mainstream fund managers including BlackRock, State Street, Vanguard, Charles Schwab, Fidelity Investments and Invesco — which together control more than 90 per cent of the US ETF market — had started a campaign to have leveraged and inverse products stripped of their ETF designation.
These dominant providers have pointed to the risks inherent in some of the ETF products marketed with SEC approval. One example was a three-times leveraged long crude oil ETP that delisted in April 2020 after a dramatic fall in oil prices wiped out its value. Some investors were also hit hard in 2018 when a spike in the Vix volatility gauge — a measure of predicted swings in US share prices — caused some inverse Vix ETPs to fall in value by more than 90 per cent.
Other observers highlight the dangers faced by less sophisticated retail investors when committing to riskier vehicles. “Perhaps the more poignant cautionary tale is the products that attracted investors seeking income, who are often retirees [during last year’s Covid-induced market crash],” says Bob Jenkins, global head of Lipper Research, Refinitiv.
He points to the example of one two-times leveraged, high-dividend, low volatility ETF that suffered losses of 60 per cent during March 2020. “If you allocated a large part of your nest egg to a fund like this in order to pump up your monthly income stream in a low-rate environment, you could have suffered devastating losses,” he says. “And there are stories out there of retired investors who experienced just that.”
ETFs, adds Jenkins, “are still considered a benign…
