Regulators to Ban Retail Access to Synthetic ETFs?

ETF TIMES: UK regulators ponder whether some synthetic ETF structures are too complex for retail markets, while last week’s best performers tracked Chinese equities

Morningstar Equity Analysts 29 June, 2011 | 9:47AM

ETF News: June 20-24
Regulators May Seek to Ban Retail Access to Synthetic ETFs
According to the Guardian, Hectors Sants, chief executive of the Financial Services Authority (FSA), voiced concerns over the increasing “opacity and complexity” of exchange-traded funds (ETFs), coming out of the first meeting of the newly formed Financial Policy Committee (FPC) held last Friday. Sants suggested that the FPC “will look at the full range of possibilities” when it comes to addressing these concerns, and “that could include concluding that some categories of synthetic risk ETFs are not appropriate for retail investors." The FPC’s findings echoed concerns voiced earlier this year by the BIS over banks potentially making use of exchange-traded products as “opaque funding structures”. Moving forward, the FPC minutes state that, “the FSA and HMT were working with the European Securities and Markets Authority and other authorities to promote a strengthening of regulatory risk standards applied to ETFs, particularly concerning improved characterization and disclosure requirements and collateral and liquidity management.”

New Issuer Ossiam debuts Five ETFs on Xetra
Ossiam, a subsidiary of French investment bank Natixis, made its debut on the Deutsche Börse last week, launching five ETFs in total. The Ossiam ETF EURO STOXX 50 Equal Weight NR and the Ossiam ETF STOXX Europe 600 Equal Weight NR track equal-weighted versions of their namesake benchmarks. The former has a total expense ratio (TER) of 0.30% while the latter levies a TER of 0.35%. These funds’ benchmark indices re-balance on a quarterly basis.

The three remaining funds track minimum variance indices which select a subset of constituents of the STOXX Europe 600 and S&P 500 indices that have historically demonstrated low levels of volatility and moderate correlations to one another. The aim of tracking these indices is to offer reduced volatility and draw-downs relative to the standard market capitalisation weighted benchmarks. Here is a snapshot of the new minimum variance ETFs:

iShares Adds a new ETF to its Fixed Income Range
Last Tuesday, iShares launched the iShares Barclays Capital Emerging Market Local Government Bond ETF on the London Stock Exchange. The fund uses a sampled physical replication approach to track the performance of local currency denominated emerging market government debt issued by Brazil, Malaysia, Mexico, Hungary, Indonesia, Poland, South Africa, and Turkey. The fund levies a TER of 0.50%.

Best and Worst Performers
The list of last week’s best-performing ETPs was dominated by ETFs tracking Chinese equities. The Chinese equity market had its strongest rally in months last week on the back of comments from Premier Wen Jiabao, who indicated that the country’s central bank is unlikely to raise interest rates given that recent efforts to curb inflation had been seemingly successful. Meanwhile, physically backed silver ETPs were amongst the week’s worst performers. Safe haven investors fled the broader precious metals market last week as fears around the stability of the Euro zone temporarily subsided as leaders drew nearer a compromise for managing the Greek debt crisis.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Morningstar Equity Analysts  Morningstar stock and fund analysts cover 2,000 mutual funds, 2,100 equities, and 300 exchange-traded funds.

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