John Ward – Crash 2: Why The Arrival Of The ‘Active ETF’ Bonanza Presages Armageddon – 18 May 2012

Huge trades show yet another sound idea being perverted by the Gods of Greed

A few months back, one of my favourite people in New York told me the Next Big Thing would be Exchange Traded Funds (ETFs). She said the ‘big beasts’ desperate for a way to make a turn on something – anything – by trading them more actively were eyeing the sector carefully. Clearly, she didn’t approve: and she’s usually right about the important stuff.

This morning, a Slogger kindly pointed out a Bloomberg piece about this very syndrome. Read this and weep (my emphases):

‘The largest trades on record in shares of two exchange-traded funds that invest in junk debt are attracting attention to the four-year-old market that allows anyone from banks to retirees fast and discreet access to speculative-grade bonds and loans. The transactions were completed hours before JPMorgan Chase & Co. disclosed $2 billion of trading losses tied to credit derivatives…Shares of an Invesco Ltd. ETF that invests in leveraged loans had a record one-day inflow on May 10…ETFs typically allow individual investors to speculate on securities without directly owning them. Unlike mutual funds, whose shares are priced once daily, ETFs are listed on exchanges and are bought and sold like stocks….’

The new element is ‘active management’ and ‘active trading’ in the sector.But that’s just more euphemistic bollocks.

Now let me tell you what this new development really is. It’s speculating aggressively – and without personal risk of ownership – on things that are worthless. Just more insane greed that offers nothing to the real investor or the economy outside the asylum. Read this peach of a quote from The Wall Street Journal:

‘Since ETFs trade like a stock, you buy and sell shares on an exchange at a price determined by supply and demand. That’s why an ETF’s market price can differ from its net asset value.’

Jonathan Swift, eat your heart out.

ETFs were originally a good way for desperate investors starved of returns to track indices and pick up margins at lower fees – do too many trades, however, and that advantage goes. Now the lunatics are moving in and changing the two golden rules for their own personal gain: buying and selling big and fast, and focusing on active dross trading rather than blue-chip passivity.

That’s the diametric opposite of the original principle…one that helped ETFs turn into a $1.2 trillion industry in 20 years….by offering passive management of holdings that stick to benchmarks set by indices providers such as Russell Investments or Standard & Poor’s.

In March this year, PIFCO and its joint ounder, Bill Gross, moved into the actively managed game. I’d love to know what his partner Mohammed Arian makes of it all, because he is by far the brighter of the two men.

All the tell-tale portents of disaster are there:

1. Betting without owning

2. Prices unrelated to asset values

3. ‘Leveraged’ (aka unreal) valuations. Junk bonds and loans are ranked below Baa3 at Moody’s Investors Service, and lower than BBB- at Standard & Poor’s.

4. High-speed reckless trading rather than long-term investment in real business.

These sociopaths will never change. They know the pointlessness, they know where the gullible are, they have the technology, and they have not an iota of interest in what this sort of nonsense can produce in terms of lost billions and fiscal mayhem.

Here we are at three minutes to midnight during the Crash Two saga….and still they’re inventing new ways to enrich themselves while pauperising us.

It beggars belief.

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