I want my mortgage backed mortgage backed mortgage backed bonds, I want my mortgage backed mortgage backed mortgage backed bonds; iShares mortgage backed bonds, MBB style!
OK, apologies to everyone for that.
iShares has just listed an ETF that tracks mortgage backed securities with ticker MBB.
I just found out this ETF a few minutes ago so I don't know much about it. It obviously has merit at different points in the interest cycle and pre-payment would not seem to be an issue like with individual GNMA pools (but we'll see if that is right or not).
I also wonder if there will be utility in tracking the spread between this ETF and one of the treasury products.
Wikinvest Wire
16 comments:
Sure is hard to keep up with all the new products - good catch, but no style points for the jingle, LOL! MBB is worth keeping an eye on, depending on what happens to rates down the road.
i don't know much about history...but i think it's "chili's"
PTL
my bad on the name!
There is something very wrong about the issuance of all these ETFs. It resembles the last days of the S&L collapse when a bank that was teetering on the brink of collapse offered the bank's own higher interest paying non-FDIC insured bonds to depositors with maturing FDIC insured CDs. Depositors were deceptively assured that FDIC insurance was not necessary based on the representation that their bank wouldn't fail.
Today everyone is being encouraged to buy ETFs in lieu of stocks, bonds, currencies, etc. But, there is no custodial insurance as there is if a bank or broker should fail. How do we know the custodians of these ETF funds are substantial enough not to fail. If they fail, what happens to the ETF and those who own its shares? Does the ETF lose all its value as an ETF and become part of the estate in bankruptcy?
I don't think it is anything like the S&L crisis. When a new fund lists it is seeded with a couple of $ million from the fund company and they buy the stocks in the index. From there assets either come in or they don't.
The total dollars in ETFs is about the same as the market cap of XOM with what I believe is 2/3 of those assets being in Barclays and State Street, reasonable I think that neither will fail and loot the funds on the way down.
The rest of the providers are too small to domino in the way you fear but candidly there is no talking someone down off of a position like the one you are taking.
You clearly should not own ETFs but why aren't you concerned with the $10 trillion in mutual funds?
Back in the late 1960’s one of LBJ’s campaign financial guys looted a mutual fund and ran off to Cuba with the dough. I forget his name, he had a very colorful, criminal sounding name. Castro offered him asylum. He may sill be there, if he is still alive.
Afterwards, laws where passed to prevent this sort of thing from happening again. One was the separation of the financial advisors and the actual possession of the fund’s assets. I believe the asset holder is always a bank, called the “custodian” in the prospectus.
How this works with a ETF, I don’t know. I would assume it’s somewhat similar, ETF’s are mutual funds, after all.
This, from The Investment Company Institute, the mutual funds industry group:
Protecting Investors: Not only are mutual funds subject to compliance with their self-imposed restrictions and limitations, they are also highly regulated by the federal government through the U.S. Securities and Exchange Commission (SEC). As part of this government regulation, all funds must meet certain operating standards, observe strict antifraud rules, and disclose complete information to current and potential investors. These laws are strictly enforced and designed to protect investors from fraud and abuse.
Check this out. This is the 2nd time I've seen Google Finance do this.
http://finance.google.com/finance?q=mbb
MBB Industries, not the bond ETF.
"Today everyone is being encouraged to buy ETFs in lieu of stocks, bonds, currencies, etc."
Actually, that's flat out not true. The only writer I really see recommend ETFs might be Timothy Middleton on Moneycentral. Look at Nusbaum's writings on Realmoney - he doesn't even outright recommend them. Almost every writer specifically points out the negative - that you have to pay a commission every time you buy an ETF.
Rydex is coming out with a managed
futures product.
Jay Charles
"the latest entry comes from Rydex, which is in the process of launching a new managed futures mutual fund focused on commodities and currencies markets. The fund – named, simply, the Managed Futures Fund – will track the performance of Standard and Poor’s Diversified Trends Indicator (S&P DTI), a simple index that applies a momentum strategy to alternative assets.
The DTI methodology is simple. First, it divides its exposure to 50 percent financials (currencies and bonds) and 50 percent commodities. Then, within each category, it goes long- or short different products based on momentum trends: if prices are heading up, it goes long; if prices are heading down, it goes short. The result is a portfolio that has, historically, had a low correlation to stocks, providing fairly steady returns without the large-scale draw-downs that afflict both equity and commodity positions."
There is a problem with many ETFs and I believe there is also a similar problem with many mutual funds, which is that a buyer doesn't know the real risk he/she is buying.
There was a time when a fund's performance was achieved primarily through holdings of stocks, bonds and options.
Today, many ETFs start off with a couple of million dollars in seed money and hope to attract a few hundred million by performing in the manner they in which they are represented. They probably use exotic derivatives to achieve such desired performance. Thus, these are mini hedge funds.
Because the risk includes the risk on derivatives, if the derivative fails, there may not be any opportunity to exit a winning trade with an expected profit or a losing trade within the limits of a stop loss. A failed derivative can create a liability that will exceed the assets of the fund.
are you saying the funds are mis-representing what they own?
If so do you have some evidence?
I make no claim of misrepresentation. I am relying on representations. For example, in the post above mine there is a reference to a new Rydex futures fund that "...within each category, it goes long- or short different products based on momentum trends..." This is in effect a representation that derivatives are used.
OK, I'm with you now-the commodity funds.
They are all fully collateralized with cash. If they were not collateralized I would give greater weight to what you are saying but if one spends $5000 on $100,000 worth of a commodity contract and puts the other $95,000 in the account with the contract I don;t see the problem.
That is what the funds do.
You can only lose more than you put up when you are on margin.
Not to be argumentative here, but my comment that ETFs use derivatives has much broaderapplication that to just some commodity funds. Here is the published profile for SDS: "The investment seeks daily investment results, before fees and expenses, that correspond to twice the inverse of the daily performance of the S&P 500 Index. The fund will take positions in financial instruments (including derivatives) have similar daily return characteristics as twice the inverse performance of the S&P 500 Index. It will employ leveraged investment techniques to achieve the objective. The fund is nondiversified".
If it is not an imposition, would you indicate what you mean when you state that the derivatives are "fully collateralized." I really do not know, because I have never operated in your business.
i don't know every last detail so you may want to research elsewhere to the extent you care about exact mechanics.
One futures contract can be purchased for something like 5% margin (anyone feel free to give the correct number if I am wrong. So for example $7000 might be able to control one S&P contract which is worth $140,000. If you have the other $133,000 in the account with the one contract you are not really on margin, not conceptually any way.
The ETFs you seem to concerned with are 90-95% invested in t-bills with the rest in futures contracts that allow them to create whatever exposure they are supposed to have.
The MBB etf is weak because it is dominated by various passive RMBS investor REITs such as CMO,MFA,ANH,NLY.
In the long run, the reason to invest in RMBS is that you capture the time value of the embedded call option in the mortgage. That's why RMBS tend to yeild ~1%-2% more than treasuries with equal credit risk.
Post a Comment