"I hope all's well. If you haven't seen it already, I thought you might be interested in this take on ETFs from Terry Smith, who, as you know, is a punchy market participant!"

Eoin Treacy's view

My comment - Thank you for this informative article on the potential problems associated with shorting ETFs. It has long been evident that the majority of investors do not read prospectuses, particularly for complicated instruments. This was as evident following the CDO led bust as it is for the myriad guises in which ETFs now appear.

ETFs which hold baskets of shares in liquid indices are straightforward and are what investors typically think of as a tracker. However, there are some features one should also be aware of. David listed these in Comment of the Day on March 21st:

"1) To maintain weightings they bid up the price of popular and ultimately overvalued shares in the index, at the expense of undervalued components; 2) This activity increases the tracker's share dealing costs, as do changes in the index; 3) The index in question may not provide the coverage that one might prefer."

Therefore knowing exactly what one is investing in is imperative with a derivative instrument which is what a tracker is by definition. In addition, some of the exchange traded funds mentioned in the above article such as those offering leverage or those that hold futures contracts are not strictly trackers beyond the extremely short term. These types of instruments are ill suited to investing and are more oriented towards nimble short-term traders.


These two additional articles from Bloomberg and ThisIsMoney.co.uk may also be of interest.