muses of the moment

April 21, 2011

The Danger of ETFs

Filed under: 401K and IRAs, ETF, Gold and Silver Investing, Precious metals — totallygroovygirlfriday @ 1:37 am

Click here for an article about the systemic risks of the exchange-traded fund industry to the global financial markets.

Make no mistake: the authorities are worried. The BIS report, for instance, has an unflattering comparison on its first page, noting that now ETFs seem to be serving the same function for institutional investors now as structured credit products did in 2002-2003, with dealers pushing the envelope as far as “innovation” is concerned. The Financial Stability Board was more straightforward, flagging its concerns that ETFs could pose a threat to stability in its report title.

And we all remember how well structured credit products held up in a debt crisis.

groovygirl has long issued warnings to investors: understand the exchange traded fund industry and read the prospectus.

Exchange traded funds were designed to be a short-term exposure or short of a particular index or natural resource market. They are not designed to be held long-term. Most of them close out and reissue every month, you can lose profits when that happens long-term.

Groovygirl suggests only holding exchange traded funds for gold, silver, and oil if that is the only investment vehicle available, such as with in a 401k investment where you are prohibited to hold physical gold and silver. Even in that situation, hold no more than 10-20%.

If there is a run on the precious metals exchange traded funds, you may not get your cash back in a timely manner, for the sell price you asked for, or at all. This is not as safe or as liquid an investment as physical gold and silver held in a private vault.

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