Mucking up a simple, transparent product, or adding tools for portfolio construction and completion?
Exchange-traded products and their myriad uses mean needless complexity to some, but to others offer flexibility and tactical advantage. There’s been a proliferation of ETF products in Europe — the majority made synthetically using unsecured debt, structured products and swaps, explains Deborah Fuhr, ETF guru and until very recently managing director of ETF strategies at BlackRock. “But most people prefer simple, ETFs that fully replicate a major index — knowing that the product has bought the underlying securities of the index,” she says.
However, there are times when an investment strategy calls for a more sophisticated ETF. “Rather than buying and then selling emerging markets securities when you suddenly feel the investment is going to lose money, it’s more difficult to get out of the investment quickly because it involves foreign currencies. But it’s easy to borrow an emerging markets ETF and short it to put on a hedge as protection for your portfolio.”
In the month of June, 9.6 percent of ETFs were shorted, equaling 1.9 billion shares, she adds. When possible or feasible, investors can short the underlying basket of securities to put on a hedge. “And if you own an emerging markets ETF you, can lend it — adding to its appeal — the flexibility to go short.” ....