Perhaps some of the most difficult investment products to understand are Exchange Traded Funds, ETFs, and as a result there are a significant number of people calling for them to be banned. The claim is that even traders don’t fully understand them which makes it even more difficult than the average investor to know what they are investing in.
The founder of Fundsmith, Terry Smith, claims that so many of these financial products have been mis sold to the average investor. It is specifically the ordinary investor who has the most trouble understanding how they work and for this reason they are a dangerous investment product. The concept of trading and holding is not understood to the extent where an ordinary investor can make a transaction based on knowledge.
The recent scandal involving a 31 year old rogue trader for UBS underlines the need for further regulations, if not banning ETFs altogether, according to Smith. Exchange Traded Funds are touted as an inexpensive way of breaking into the market without the necessity of holding a huge portfolio. However, they are also an extremely complex investment product which makes them as dangerous as they are low-cost.
Conversely, there are those who state that this is an isolated incident which involved one rogue trader working with one firm, UBS. Only UBS and its shareholders actually lost money which is seen by advocates of ETFs as simply one incident and nothing to be overly concerned with. However, even such entities as the International Financial Stability Board and the BoE are still concerned about the safety of ETFs for ordinary investors and are being vigilant as a result.
In the end, there are a number of experts who maintain the ETFs can be a wise investment for those who don’t have or want to place a huge amount of money into investment products. ETFs aren’t associated with high management fees which makes them particularly appealing. Yet as the UBS scandal indicates, they do need to be closely monitored and investors should have a solid understanding of the product before investing money.
