The Dark Side of ETF

ETFs or Exchange Traded Funds are low-risk investment plans offered by companies to protect themselves from significant losses through support from different investors. Through ETF, investors could have a significant part of the company while having the right to sell them as the company improves.

As a low risk investment option for investors, it is always a part of the portfolio. This will balance the portfolio as investors will also have high risk investment options such as regular traded shares and stocks. It could even be a safe investment plan for those who wanted to have a simple investment plan until they retire.

But a low risk investment plan is still a risk to be considered. ETFs could go down and will cost you if you are not sure on the investment plan you are going through.

Fear of the Unknown

The data regarding ETFs is always available online and financial experts could easily describe the processes about the investment plan. Still, the common problem most financial advisers and investors have in ETF is the unknown. There is undisclosed information regarding ETFs that makes most brokers feel they are left in the dark without any hopes for help. Transparency is always a problem with ETF and the company that owns them.

The most prevalent data veiled from investors are the collateral offered by companies to the owners of ETFs. In the efforts to increase the safety of ETFs, companies lend shares with collateral as the funds are used for other investment schemes. This could be done with collateral as security.

The usual form of collateral could be in securities, bonds or in cash. Unfortunately, the data is not revealed to investors. This is a very important data since it will determine if the company has been provided with the right collateral to ensure that the transaction is strong and even legal.

There is also varying dangers in different types of ETFs. The following are currently the “controversial” type of ETFs because of the losses it has posted for their investors.

• Exchange Traded Notes (ETN) – Lehman is now the classic example of a seemingly safe investment plan that went wrong. The success of this type of investment depends on the underwriting bank, specifically the credit standing of the bank. Lehman encountered a big problem because they also control their banks.

• Fixed Income Funds – this is another low risk investment option but the risk could be easily realized and will be the cause of its downfall. There are two things you should be concerned with in fixed income funds: inability to liquidate and susceptibility to defaults. This rarely happens but it does…and it did. Because of the recent economic problems, default happened and getting out from fixed income funds is very difficult.

Safe ETFs

Fortunately, there are ETFs that has proved its sturdiness even with the changing economic situation:

• Precious Metals – There is probably no better time to invest in metals (and stones) than today. Almost every other ETF is experiencing a little problem in terms of liquidity and defaults but precious metals have survived the market and continue to do so. Gold and other precious stones will always improve.

• Commodity Futures – This is often conceived as risky ETF but for some reason, it didn’t have any problems in the past. The reason why it has been efficient for some time is the counterparty feature. It balances the risk which has greatly proved its success.

• Currency Funds – The classic currency ETF will always be there. This type of ETF gives everyone the chance of riding the US problem with ease and even earning from it.

ETFs will always have its dark side and could be highlighted which will create problems to the investor. But there are safer ETFs which will ensure success in your portfolio.