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[CityFarmer]

An interesting view. I reckon, the root cause, isn't on the product itself, but on "enhancement(s)" which have distorted the original product or concept.

For the securitization, the concept is good, but the repackaging with a "falsified" rating, is the root cause of GFC2008.

For the ETF, I have seen product named as "Active ETF"? Based on description, it sound like a broad-based active fund, rather than the passive ETF as we all know. I didn't check further, but I guess the fee should be much higher than the typical 0.3%, and carries much higher volatility than the index.

[greengiraffe]

• Oct 24 2015 at 12:15 AM 
   
  As ETFs get edgier, fundies turn up the heat on market 'robots'

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[img=620x0]http://www.afr.com/content/dam/images/1/m/5/h/6/k/image.related.afrArticleLead.620x350.gkgo8w.png/1445584558726.jpg[/img]"The major question is how will ETFs perform in a period of acute market stress," says Geoff Wilson, the chairman of Wilson Asset Management. "My guess is they will create major liquidity problems and dislocation in financial markets." Louise Kennerley

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•  Jonathan Shapiro
  

It's the latest front in the war between active management versus passive management. The booming take-up of exchange traded funds in Australia has turned the $19 billion sector into a target of criticism by active investors, the traditional stockpickers who have dominated the Australian equity markets.
ETFs are the easiest way to get exposure to almost any investment universe: equities, bonds, commodities, currencies and anything else that can be captured in an index. They are also cheap, and it's not uncommon to find an investment manager who uses ETFs in their stock picking. 
But a volatile third-quarter has inflamed the debate between the active and passive camps about the use of ETFs in the part of the market that is known as "high yield". As indices get more exotic and appetite for "smart beta" products rises, ETFs have found a natural home as the tool of choice to execute these edgier ideas.
"The major question is how will ETFs perform in a period of acute market stress," says Geoff Wilson, the chairman of Wilson Asset Management. "My guess is they will create major liquidity problems and dislocation in financial markets."
[img=620x0]http://www.afr.com/content/dam/images/g/k/g/y/q/5/image.imgtype.afrArticleInline.620x0.png/1445572695840.png[/img]
He is not alone in airing his concerns. Ashok Jacob, the Ellerston Capital chief investment officer, told AFR Weekend earlier this year that ETFs – championed by advocates for their simplicity – are "complex beasts". 
"It's like a blood transfusion, or its reverse, into a single living organism. It takes time for the organism to adjust to the new level of activity. That's called volatility and explains to an extent the extraordinary reactions to minor upgrades and downgrades by individual stocks. The robots are programmed to react."
Team Active says ETFs exacerbate volatility on the way down, and they point to ETFs tracking China's hot-and-cold A-shares market for having a role in inflating the bubble in Shanghai and Shenzhen stocks. On Black Monday, August 24, several broad-based ETFs plunged in flash-crash style on Wall Street before recovering, inexplicably caught in a chaotic feedback loop.
Every ETF provider questioned by Weekend AFR argued that ETFs just mirror the volatility in the market they track, guided by investor behaviour the way all securities are.


CURIOSITY-INCITING SOURCE OF INTRIGUE
There are at least two examples in Australia that have been a source of intrigue for active investors. Neither is straightforward.
In March, BlackRock found itself with a more than 20 per cent stake in ASX-listed Monadelphous Group after its tracking products dutifully matched an offshore high-yield index. In what may be just an unintentional gaffe, an index provider incorrectly rebalanced its weighting towards Monadelphous. ETFs do not discriminate in what they own, so BlackRock's products followed suit and reset themselves to replicate the erroneous index.
"Upon becoming aware of the fact that BlackRock's holding had reached 20.77 per cent of the voting power of the company, BlackRock promptly sold shares," the asset manager said in a statement to the ASX. It's believed the unusual situation was reported to regulators and no sanctions followed. But did one error suddenly become two?
[img=620x0]http://www.afr.com/content/dam/images/g/h/y/u/f/g/image.imgtype.afrArticleInline.620x0.png/1436076934795.jpg[/img]Ashok Jacob ... ETFs are "the most complex beasts in equity history". Sahlan Hayes
Another curiosity-inciting episode is one linked to Metcash and a tough transformational period for the company earlier this year involving an impairment, accounting revisions, dividend reduction and asset sales. This coincided with an unverified broker estimate that at the time, dividend-seeking ETFs controlled about7 per cent of the company.
The market reaction to Metcash's announcements was severe and it has been suggested this was exacerbated by the ETFs exiting the register. But with so many events surrounding the stock, it's almost impossible to ascertain who sold and for what reason.
Jon Howie, head of BlackRock's iShares business in Australia, says that accessibility, simplicity and transparency are the overwhelming appeal of ETFs to Australian investors.
"The ETF is there simply to provide access to the market. If investors are panicking … they'll sell ETFs as well," he says. One area where he suggests the lines have been blurred is the application of leverage, which on its own can heighten volatility, but is used widely and not limited to ETFs.

PATERNALISTIC RESPONSIBILITY
"We don't want to confuse investors by saying that ETFs cause volatility because it's not the ETF," he says. "As the largest issuer in the market we kind of feel almost this paternalistic responsibility to the overall ETF industry. We have to make sure that we're putting investors' interests first."
BlackRock's iShares is also the biggest local issuer, followed by State Street and Vanguard.
Primary and secondary market volumes are a useful gauge of ETF influence. "It's important to remember that due to the unique creation/redemption process of ETFs, not every ETF trade, even one of large size, facilitates a trade in the underlying securities – [that is] the primary market," a State Street SPDR Australia spokesperson said in a statement.
Alex Vynokur, managing director at BetaShares, says volatility in an ETF should never exceed the volatility of the index it tracks.
"To turn around and blame ETFs for exacerbating volatility, I don't think that's correct, ETFs often reflect the volatility that's in the market." He adds, "ETFs [are] not a way to manufacture liquidity of an illiquid asset class. Do not expect an ETF to make something liquid that otherwise is not."
Which lends itself to the argument that not all ETFs are created equal.
It comes down to "the liquidity match between your investor base and what you invest in," says Sebastian Evans, chief investment officer at NAOS Asset Management. He uses a US dollar ETF to manage the fund's cash exposure.
Lee Ainslee, from hedge fund Maverick Capital, saw how ETFs could perversely make active fund managers more competitive. "ETFs can certainly create dynamics that are not very fundamental in nature, but in the same time they create price opportunities by doing so, so longer term are beneficial to us," he said in Sydney, at Citigroup's conference this past week.
"I do wonder about ETFs that have these built in leverage features, which have consistently shown to not work as advertised in periods of stress. But they have become much smaller than they used to be so people are becoming aware of that."