Debt Sustainability - Etfs

Huge growth of ETFS investment which now controls around $2 trillion of financial markets have concerned financial regulators since it can be a new source of scandal or even systemic risk. ETFS is a fund that tracks an index, but can be traded like a stock. On the plus side, ETFs are more tax efficient than normal mutual funds, and since they track indexes they have very low operating and transaction costs with them. There are no sales loads or investment minimums required to purchase an ETFS. ETFS allow investors a convenient way to purchase a broad basket of securities in a single transaction. Essentially, ETFS offer the convenience of a stock along with the diversification of a mutual fund.

Today, these securities compete with mutual funds and offer a number of advantages over their predecessors, including:

Low Cost

Unlike traditional mutual and index funds, ETFs have no front- or back-end loads. In addition, because they are not actively managed, most ETFs have minimal expense ratios, making them much more affordable than most other diversified investment vehicles. Most mutual funds also have minimum investment requirements, making them impractical for some smaller investors. By contrast, investors can purchase as little as one share of the ETF of their choice.

Liquidity

Whereas traditional mutual funds are only priced at the end of the day, ETFs can be bought and sold at any time throughout the trading day. Many have average daily trading volumes in the hundreds of thousands of shares per day, making them extremely liquid.

Although exchange-traded funds offer several advantages over traditional mutual funds, they also have two distinct disadvantages. To begin, the securities that an ETF tracks are largely fixed, so investors that prefer active management will probably find ETFs wholly unsuitable. Furthermore, because they trade as stocks, each ETF purchase will be charged a brokerage commission. For those that make regular periodic investments, these recurring commissions might quickly become cost prohibitive.

Growth and versatility of ETFS like leveraged ETF and synthetic ETF have envisioned another concern that excessive financial innovation may go out of control just like the trend of subprime housing crisis. These versatility and complexity of emerging ETFs have simply faded the original aim of its invention which was based on low-cost and easy liquidation.

Conclusion

To sum up, rapid trading of ETFS is an area of concern especially when illiquidity is on the horizon. Creating synthetic ETFS cannot be a cure since their underlying assets are illiquid themselves. Industries are concerned that a failure might devastate the appeal of ETFS completely because new underlying assets are not even funds in some cases. As with any security, the pros and cons

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