ETF bashing is as impartial as Salem witch trials

ETFThe news that UBS trader Kweku Adoboli, who allegedly caused losses of about €1.7 billion through rogue trading, dealt in exchange-traded funds (ETFs) at the Swiss bank has reignited a debate over the apparent dangers of ETFs.

Terry Smith, an active fund manager and CEO of Fundsmith, wrote that the incident shows it is “indisputable” that “the risks that are being incurred in running, constructing, trading and holding [ETFs] are not sufficiently understood”.

But Alan Miller, a founding partner at SCM Private, countered in the Evening Standard that the attacks on ETFs are mistaken. SCM Private manages portfolios of ETFs for its clients.

“Current self-interested debate on the dangers of ETFs would seem about as fair and impartial as the Salem witch trials,” he said.

Miller said criticism of synthetic ETFs, which rely on derivatives and are exposed to counterparty risk, fails to acknowledge that a range of other investment vehicles from structured products to half of unit trusts have similar risks.

He said the funds industry dislikes ETFs because they can achieve better performance than actively managed funds owing to their low fees. Another reason is that they are available direct, meaning investors can cut out expensive City agents.

Miller said UBS and the other banks should examine the lack of risk controls that allowed Adoboli allegedly to commit fraud and not the instruments he used.

©2011 funds europe