UBS debacle highlights dangers of ETFs

FOUR HIDDEN RISKS

City financier Terry Smith has been a long-standing critic of exchange-traded funds (ETFs). Here he explains why the latest rogue trader scandal, which is reported to have cost UBS $2bn, shows the hidden dangers of ETFs.

The losses of $2bn incurred by an allegedly rogue trader on the Delta One desk at UBS have again raised the subject of the (lack of) risk controls by banks dealing in opaque instruments, the need to separate investment and retail banking and the risks inherent in ETFs. I have written over the past year about the unappreciated risks in ETFs and it is probably time to bring these thoughts up to date. ETFs are regarded by many investors as the same as index funds. They clearly are not: 1. Some ETFs do not hold physical assets of the sort they seek to track. They are "synthetic" and ho...