Show some guts: Time to tiptoe back into energy

31 Dec 2014 | Author: | No comments yet »

Complex etfs: watch out for poor liquidity.

Complex Exchange Traded Funds (ETFs), particularly those which use derivatives or have poor liquidity, must be thoroughly researched before any investment ETFs, or exchange traded funds, have become increasingly popular in recent years. Today is the last trading day of December—and the year—a month that has seen oil prices drop to their lowest point in half a decade on concerns about global supply that is also taking its toll on individual oil-related companies.

ProShares has announced that it will close and liquidate 17 ETFs, many short strategies pegged to various Russell indexes, none of which had gathered assets. The number of these products, which track the performance of various indices and commodities in a low-cost tradeable fashion, has increased dramatically. That’s according to Bloomberg’s Jim Polson, who notes that more than $3.1 billion has poured into ETFs that own some of the biggest oil names, like Exxon Mobil (XOM) and Schlumberger (SLB)—but they likely have a long-term focus: “There definitely seems to be evidence of investors seeking to bottom-fish this market and pre-position for 2015,” David Mazza, head of ETF research at State Street Corp., said in a phone interview. “Some investors we’ve spoken with don’t believe the negative picture on energy that’s become consensus.”… “Longer-term investors, two to three years from now, will look back on this and say, ‘God, that was a good buying opportunity,’” said Fadel Gheit, a New York-based energy analyst for Oppenheimer & Co.

As ETF.com’s Oliver Ludwig notes, the 17 ETFs amount to more than 11% of ProShares’ 150-fund portfolio, and bring the total number of ETF closures this year to 87, easily beating last year’s 73 closings. For short-term investors, “it’s not going to be very pretty for the next few months.” Nonetheless, despite this optimism, most major oil names, including Exxon, Chevron (CVX), BP (BP), Schlumberger and Halliburton (HAL) closed lower on Tuesday—as did the Energy Select Sector SPDR (XLE), down 5.2% in the past month and 7.1% in the past year—despite small gains in crude oil prices.

Justin Modray, of independent financial adviser Candid Money said; “The iShares MSCI World Minimum Volatility ETF invests in around 260 shares with a bias towards the healthcare, financials and consumer sectors. Derivatives are financial contracts the value of which are dependent upon, or derived from, one or more underlying assets, such as stocks, bonds or commodities. The derivative itself is simply a contract, so if the issuer does not pay the sums due to the ETF, the ETF investor won’t get paid, even if the underlying assets have performed well. It is very important that you understand what you are doing if you invest in these type of products, as losses (and profits) could mount up very quickly. Adam Walkom, of IFAs Sterling & Law, said: “Because more complicated ETFs don’t tend to directly follow a popular index, they can lack the underlying liquidity that traditional ones have.

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