Thursday, 23 February 2017

New ETFs: exotic or toxic?

Article on Bloombers website:

Singapore Readies New Exotic ETFs to Catch Taiwan, Hong Kong

A snippet:

Preparations are underway in Singapore for the first new listing of leveraged and inverse exchange-traded funds in almost eight years.

Singapore Exchange Ltd. last week published a new web page about the products, described as “a form of passive collective investment schemes (like ETFs) and structured as open-end funds,” following revised guidelines from the Monetary Authority of Singapore in August.

Singapore, along with Hong Kong, is seeking to capture a bigger share of an expanding pie through types of funds that have seen success in Japan, Taiwan and Korea. Leveraged ETFs in Taiwan, which started in 2014, now have more than $4.8 billion in assets, according to data compiled by Bloomberg. Daily trading of inverse and leveraged funds is more than half of Taiwan’s ETF market, said Andy Chang, president and chief executive officer of Cathay Securities Investment Trust Co.

I am seriously underwhelmed by this initiave, is this really the best the SGX can come up with to attract retail investors?

I like "long" ETFs on a certain large market with low fees very much, I use them myself if I think a market is relatively cheap and I don't have my eyes on some particular stocks in that market.

I can also imagine that an investor sometimes wants to invest in an inverse ETF without leverage, as a (partial) insurance against his portfolio of value shares going down together with the market when the market looks richly priced but the value shares still offer enough upside.

But these leveraged ETFs, I am not keen at all on them, the management fees are often much higher than the "long" only ETFs. In addition to that there are also higher expenses related to the instruments the ETFs use to create the leverage. In the longer term the fees will have a serious impact on the returns.


  1. One issue of leveraged ETFS is their natural decay due to some moves. Let's take a times two ETF for example. The day the market moves up 5%, the ETF will move up 10%. Now if the next day, the market move back down to its original point, the ETF won't. Indeed, the market will have to loose 4.76% on the second day to be flat on the two days, and the ETF will loose 4.76%x2 = 9.52%. So the performance of the ETF on the two days will be -0.48% = [(1+10%)x(1-9.52%)-1]. That is the basis for a quite popular arbitrage strategy which has pushed up the price of the borrow on those leveraged ETFs.

  2. Thanks for your comment. Leveraged ETFs often promise to mimick the return on a daily basis. Results might disappoint in a choppy market, even if the direction is in general the one forecasted. Your example seems to illustrate that also. A case of "Buyer Beware", I guess.