I understand that investing in certain ETFs (structured types) exposes the investor to counterparty risk, as some of you posted elsewhere. Is the ETF investor facing the counterparty risk of a financial institution that has entered into swaps or similar transaction with the ETF vehicle? Or is the investor facing the counterparty risk of the ETF vehicle itself, or ETF manager? Thanks.
The only counterparty risk that I know of in ETF’s is that they can gain exposure through swaps, but it is limited to 10% of the notional size. There is no counterparty risk from the ETF vehicle or the manager unless you think the manager is going to do a Vesco thing by liquidating the assets and fleeing to Cuba.
Swaps limited to 10%? Here’s UYG’s holdings with swaps at 14.47%: AMER EXPRESS INC AXP 1.92 AMER INTL GROUP INC AIG 3.08 BK OF AMERICA CP BAC 5.3 BANK OF NY MELLON CP BK 2.15 CITIGROUP INC C 4.55 Djusfn Swaps N/A 14.47 GOLDMAN SACHS GRP GS 3.14 JP MORGAN CHASE CO JPM 5.9 US BANCORP USB 2.4 WELLS FARGO & CO NEW WFC 3.69
DK. It might be that a) 10% applies at initiation of the swap b) UYG is not compliant with the rule for some reason or another c) The rule is something I had a dream about and it doesn’t really exist.
ETN’s are the ones with big counterparty risk. See Lehman’s ETNs: http://www.etftrends.com/2008/09/barclays-said-to-be-staying-away-from-lehman-etns.html
How do the double long/inverse etfs work? If there is a significant move against the etf is there a margin call? If so do margin calls materialize in the form of shareholder losses?
It’s not the margin call that matters; it’s the loss in the futures contract (or swap if there is a marked to market feature with margin calls). Eventually, I guess you would have to sell stock to make margin and then you would need to lever up more in the derivative. That would suck.