The ETF blowup begins | FT Alphaville

The ETF blowup begins

H/T Zerohedge for drawing attention to the fact that UBS has suspended purchases of leveraged and inverse ETFs. We’ve now got the official statement from UBS:

“UBS Wealth Management Americas has suspended purchases of leveraged and inverse ETFs to our clients, effective immediately, as the short-term nature of these securities is generally inconsistent with the long-term view of investing that UBS advocates when building client portfolios.  In addition, recent regulatory guidance on leveraged and inverse ETFs reinforces the short-term nature of these products, particularly in volatile markets.  UBS Wealth Management Americas’ financial advisors have been fully briefed and our clients are being contacted regarding these securities.”

This comes on the day the UNG natural gas-tracking ETF — one of the most popular funds of its type — was forced into the over-the-counter bilateral swap market having neared most of its position limits in the regulated sphere. As we noted earlier this introduces a whole new counterparty risk element into the pricing of ETF units.

Market participants have criticised leveraged and inverse ETFs, alongside commodity ETFs,  as being too complex for retail investors to understand. In fact, many have said they would prefer to have them billed as structured products. That’s because more often than not — as it turns out — these instruments fail to perform as expected. In most cases, though, a thorough reading of the prospectus would alert professional investors to their unexpected nature.

If UBS sees fit to suspend these products from the market, this raises important questions over the model’s viability and the recent trend towards the ETF-ization of nearly everything.

Related links:
UNG goes OTC
– FT Alphaville
The problem with commodity ETFs
– FT Alphaville
Commodity ETF investors move significantly into natural gas
– FT Alphaville