Simon Read: Understand the risks before choosing ETFs

Exchange Traded Funds are sold as a low-cost way to invest in a wide range of different investments. They are similar to tracker funds in that they are passive investments. But problems are beginning to be voiced about just what the underlying investments are, and are they safe.

The Financial Stability Board published a paper this week highlighting the dangers. The problem, according to the FSB, is the complexity of some of the funds. Some use swap agreements with counterparties which agree to provide a return that matches the underlying asset class or the index that the ETF is seeking to track.

That's effectively all about protecting the investment, but we know from recent experience that counterparty risk can lead to massive problems if the counterparty defaults. It's what led to the downfall of Lehman Brothers, and UK investors in Keydata also experienced a collapse and losses because of counterparty risk that proved unsafe.

That doesn't mean that ETFs are unsafe. But it does mean that some complex funds may not be suitable for average investors. As ETFs become more popular, more of us are likely to be exposed to funds that are really only suitable for professional investors who are paid to take and understand risks.

Returns on some of these look hugely attractive. There's a silver ETF, for instance, that's climbed 93.2 per cent in a year, but at the same time a leveraged silver ETF has soared 289 per cent. I was alerted to these while chatting this week to financial planner Kevin Deamer of KMD Private Wealth Management. "This level of performance could attract retail investors to leveraged funds, which would be dangerous," he told me. "I doubt many IFAs or wealth managers feel competent enough to recommend these, so investors should stay away, well away."

It's a timely warning. Would you invest in a hedge fund? If not, avoid the riskier ETFs. The key is to understand what you're investing in and if you don't, avoid it. At the same time the industry must help by making ETFs more transparent.

Cheques may yet be getting a reprieve. The Treasury Select Committee said this week it was reopening its inquiry into the future of cheques "as a result of continuing public concern over plans to abolish them by 2018".

Personally I haven't used a cheque for years, but am aware that millions of people do still do so. Small businesses in particular are reliant on them. Until the banking industry finds an acceptable alternative, then the paper payments should not be scrapped. I'm glad that people power has forced the Treasury to think again.

s.read@independent.co.uk

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Arts and Entertainment
filmPoldark production team claims innocence of viewers' ab frenzy
Life and Style
Google marks the 81st anniversary of the Loch Ness Monster's most famous photograph
techIt's the 81st anniversary of THAT iconic photograph
News
Katie Hopkins makes a living out of courting controversy
people
News
General Election
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Guru Careers: Pricing Analyst

    £30 - 35k (DOE): Guru Careers: We are seeking a Pricing Analyst with experienc...

    Ashdown Group: Treasury Assistant - Accounts Assistant - London, Old Street

    £24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...

    Ashdown Group: Sales Team Leader - Wakefield, West Yorkshire

    £21000 - £24000 per annum: Ashdown Group: The Ashdown Group has been engaged b...

    Ashdown Group: Head of Client Services - City of London, Old Street

    £45000 - £50000 per annum + benefits : Ashdown Group: A highly successful, int...

    Day In a Page

    Revealed: Why Mohammed Emwazi chose the 'safe option' of fighting for Isis, rather than following his friends to al-Shabaab in Somalia

    Why Mohammed Emwazi chose Isis

    His friends were betrayed and killed by al-Shabaab
    'The solution can never be to impassively watch on while desperate people drown'
An open letter to David Cameron: Building fortress Europe has had deadly results

    Open letter to David Cameron

    Building the walls of fortress Europe has had deadly results
    Tory candidates' tweets not as 'spontaneous' as they seem - you don't say!

    You don't say!

    Tory candidates' election tweets not as 'spontaneous' as they appear
    Mubi: Netflix for people who want to stop just watching trash

    So what is Mubi?

    Netflix for people who want to stop just watching trash all the time
    The impossible job: how to follow Kevin Spacey?

    The hardest job in theatre?

    How to follow Kevin Spacey
    Armenian genocide: To continue to deny the truth of this mass human cruelty is close to a criminal lie

    Armenian genocide and the 'good Turks'

    To continue to deny the truth of this mass human cruelty is close to a criminal lie
    Lou Reed: The truth about the singer's upbringing beyond the biographers' and memoirists' myths

    'Lou needed care, but what he got was ECT'

    The truth about the singer's upbringing beyond
    Migrant boat disaster: This human tragedy has been brewing for four years and EU states can't say they were not warned

    This human tragedy has been brewing for years

    EU states can't say they were not warned
    Women's sportswear: From tackling a marathon to a jog in the park, the right kit can help

    Women's sportswear

    From tackling a marathon to a jog in the park, the right kit can help
    Hillary Clinton's outfits will be as important as her policies in her presidential bid

    Clinton's clothes

    Like it or not, her outfits will be as important as her policies
    NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

    Who's monitoring the outsourced NHS services?

    A report finds that private firms are not being properly assessed for their quality of care
    Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

    Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

    The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
    How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

    How do Greeks feel about Syriza?

    Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
    From Iraq to Libya and Syria: The wars that come back to haunt us

    The wars that come back to haunt us

    David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
    Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

    Too busy to surf? Head to The Pool

    A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders