Anyone would think that the FT is running a co-ordinated campaign against ETFs (Exchange Traded Funds) this morning, based on this part of a mail they have sent:
I too have major reservations about ETFs, their stock lending, the ethics of this behaviour, their corporate governnance in general and their impact on markets, where they can become a bastion of inaction permitting perpetuation of management driven market abuse at cost to society at large.
I suspect though that the FT is really just worried that passive investors don't buy the FT. Or is that too cynical of me?
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
stock lending isn’t that bad in itself, if disclosed adequately. can reduce costs for passive investors, though risks need to be made clear.
ETFs have more scope than other passive-style funds for ethical investment / corporate governance, as index can be built to select for corporate governance. not flawless, but what is?
Expect to hear a lot more from fund managers pointing out the perils of passives. they have a point that any rule-based investment approach can be gamed.
active funds can cover shonky businesses too. particularly when those on the boards of investment trusts are on the boards of the companies being invested in, to name one example…
I have deep problems with stock lending
When there is a security mismatch in the current market the risks are much higher than are acceptable
“stock lending isn’t that bad in itself, if disclosed adequately”
And what should we call ETF’s without adequate disclosure? – WTFs?
🙂
It could very well be that the drive for profit these days is so intense that it is making even the more hard line free market proponents incredulous with what some are trying to get away with.
Contemporary capitalism is capitalism without shame.
ETF’s have been brilliant. They have tracked the bull (bubble) market and will keep tagging along until it stops climbing.
There is an aspect of their behaviour which is emphatically not passive, and that is that they inflate the price they are tracking. It’s rather like benchmarking salaries – anybody ever see a benchmarked salary adjusted downwards ?
If pundits at the FT have only just twigged that tracking funds may prove to be as adept at following a market down as they are at following it up….. I despair.
I suggest that whether tracking funds will moderate the rate of collapse or accelerate it is unknown. We will have to wait and see.
Markets are falling….
“Markets are falling…. ”
Or they may be adjusting….. or correcting… FTSE is still above 7000 which everybody thought was fanciful before it got there.
Makes Bitcoin’s decline look quite placid.
Of course they will accelerate it. This whole thing is a bit like the history of derivatives generally. Derivatives were initially conceived as something that was meant to be a stabilising influence, that helped real producers hedge their risks, eventually they became an end unto themselves, proliferated beyond all credible proportion and became an accelerant to instability.
Initially and ostensibly ETF’s presented as kind of innocuous, lazy, risk-offsetting option but as they accumulate the destabilising potential becomes apparent. It is inherent in the sheer weight and number of them, the index tracker outweighs the index and stability is lost along with all sense of relative proportion.
Marco Fante says:
“Of course they will accelerate it. ”
Well, yes, I think so. I don’t quite see how they can do otherwise.
But, I expect the masters of the universe have a cunning plan. (Like they did last time and the time before)
Jesus this is out of control.. some things are worth protesting about ETFs are not..they are a cheap way for both large and small investors to invest..end of story
And they have enormous systemic implications
You stay with your micro view
Some of us worry macro
Dc says:
February 5 2018 at 10:34 pm
“Jesus this is out of control.. some things are worth protesting about ETFs are not..they are a cheap way for both large and small investors to [lose a lot of money perhaps ?]….. end of story.”
They have performed very well in one of the longest bull markets in history (which may be far from finished). How they will behave when they spot a bear remains to be seen.
I think a lot of people may be doing what the bears do in the woods. I find it hard to believe that the ETF is the philosophers’ stone humanity has spent so long searching for.
Neatly put
Dc says:
“some things are worth protesting about ETFs are not”
Then you’d better go and tell the Financial Times, they don’t seem to agree. nor does this guy:
https://www.cnbc.com/2017/08/04/as-etfs-blow-past-hedge-funds-paul-singer-has-had-enough-says-they-are-devouring-capitalism.html
The FT are very sure they are bad news
There is no macro..all of the money in ETFs would find its way into equity and bond markets anyway either direct or via more expensive managed funds. There has been many causes worth campaigning about over the years (in the area of investment products) – with profits funds, split caps, retail structured products, loaded binary options but ETFs are not one of them . To the contrary they are liquid, transparent and cheap. Finally you might not like stock lending but it is adopted by pretty much every reasonable sized investor including pension funds and local authorities.
I assure you there is macro
And macro consequnces of structures
Let me offer one for you to muse on
How can a passive fund exercise active stewardship?
And how does capitalism survive without active stewardship?
I like ETFs. Mostly.
The macro implications are the same as any tracker: they reinforce ‘momentum’ and can become a dangerous volatility multiplier.
…And there are bad choices, and bad ideas on offer: what you trade, and how you trade it, are available in several flavours. Some of them unpalatable, some of them toxic.
Some of them are good.
The distinguishing feature of an ETF is that the public-facing ‘Fund’ side of selling units of a tracking pool of assets has a market-facing ‘Exchange’ side.
If the ‘Fund Managers’ are not adding value and the units are trading for less than the sum of their parts, wholesale traders can buy up the units on the Exchange and ‘break them up for parts’.
Do that for long enough – the value-sapping ineffective management of far too many ‘mutuals’ and funds and pensions – and, one day, the last unit of your fund will have been broken up, and paid out at the market price to your investors.
So you have to be efficient, and the consequences of your failure are a transparently-fair exit price for the investors.
‘Real’ fund managers hate that – it’s an obvious rebuke to their mediocrity – and it is entirely unsurprising that the FT takes their side.
I think those are micro consequences
The macro consequences are massive unaccountable holdings by supposedly passive and transient owners meaning even fewer people to hold corporations to account
Nile,
“The macro implications are the same as any tracker: they reinforce ‘momentum’ and can become a dangerous volatility multiplier.”
Yes, well said – so….?