Wealth managers voice concerns about L&I ETFs
Investors stand to lose a lot of money if they do not fully understand how leveraged and inverse (L&I) exchange-traded funds work, suggested speakers at AsianInvestor’s ETF Summit last week.
These products – which are new to certain Asian markets – should be clearly differentiated from their plain-vanilla peers, and investors should be properly educated on how they should be used, agreed wealth industry executives.
L&I ETFs have already proved very popular in Korea and Japan and the first such products are tipped for launch in Hong Kong next month. Singapore is also keen to see them listed on its exchange, but there is said to be little demand among asset managers to list them in the Lion City.
Jessica Cutrera, managing director at Hong Kong-based wealth manager EXS Capital, said her biggest concern was that L&I products would be misunderstood. “They mostly have a daily reset,” she noted. “They are not made for asset allocation and are not appropriate for taking a long-term view.”
Clients could lose a lot of money on short-term volatility if they held onto their L&I funds, said Cutrera, whose firm uses ETFs as building blocks for client portfolios. The prospect of 3x bull and 3x bear options, to be made available in Singapore, could result in some very negative outcomes, agreed the panelists.
The kind of losses suffered by Asian clients on leveraged equity 'accumulators' – dubbed "I kill you later" – post the 2008 financial crisis are likely still on wealth managers' minds.
Charis Wong, Credit Suisse’s head of mutual funds and ETFs, said she welcomed the greater diversity of ETFs, but said: “We have to be very careful about making sure everyone understands these funds are useful for short-term hedging, but not for long-term financial planning.”
In fact, L&I funds are not even the most appropriate product for hedging purposes, argued Steven Seow, Asia head of wealth management at investment consultancy Mercer. “If the client is trying to hedge a downward market, there are better ways to do it using futures and options.”
Seow said wealth managers may be more comfortable recommending plain-vanilla ETFs and then having a separate conversation on leverage. “I’m not against leverage; but I just think it’s best to keep leverage outside the product.”
These concerns reflect those of the regulator in Hong Kong, which has insisted on a two-stage introduction of ETFs. The Securities and Futures Commission wants to see how the products are used in the first phase, when it will not allow funds linked to Chinese or Hong Kong indices.
Experience elsewhere suggests interactive education – not simply including descriptions in marketing material – is the only way to ensure that problems do not occur through misuse of these products.
Cutrera said: “The marketing materials don’t always make it clear how these products work. We’ve seen this in the US, where materials made available were not explaining clearly the implications of the product. It is our job as advisers to tell the client that this is not necessarily the product they want.”