Exchange-traded funds, publicly traded instruments usually linked to an equity index or commodity, have been one of the hottest financial fashions for years now. ETF volumes have soared by 40 percent annually over the past decade to reach some $1.2 trillion worldwide, eight times the growth rate of mutual funds. Commodity ETFs are a small part of this pie, about $150 billion, but one of the fastest growing as the dominant method for Main Street and Wall Street investors alike try to cash in on rising materials prices.
The Financial Stability Board, the international watchdog launched in 2009 and based in Basel, raised an eyebrow at this prolific growth industry in a brief report this April, finding “a number of disquieting developments in some market segments which call for closer scrutiny.”
The Financial Times amplified this bureaucratic understatement, comparing ETFs to the infamous collateralized debt obligations (CDOs) that helped precipitate the great market panic of 2008. Then, as if on cue, commodities markets sharply corrected in mid-May, reminding investors in popular ETF categories like oil and silver that their bets can sometimes go badly wrong.
Market mavens like John Gabriel, who follows ETFs for Morningstar in Chicago, agree they are probably not the best vehicles for buy-and-hold retirement investments. But when used as more or less directed, as highly liquid and potentially high-performing supplements to the fund-management diet, the risks look acceptable.
Read the entire article in this week's Capital eBook (June 14).
Additional stories in the Capital eBook:
Fund managers are looking harder at emerging-market corporate bonds and sovereign paper issued in local currency.
Credit quality among high-yield issuers is on the rise.
