March 26, 2008 at 1:00 am by Tom Lydon
Four exchange traded funds (ETFs) are in the making that will track credit default swap contracts, according to CCM Partners of San Francisco, who does business with California Investment Trust Fund Group. The funds are currently in registration with the Securities and Exchange Commission (SEC).
David Hoffman for Investment News explains that a credit default swap, or CDS, is a type of derivative that is basically a form of insurance against a company’s defaulting on debt. The swap buyer pays a quarterly fee to the seller, and in exchange, the seller agrees to make a payment to the buyer in the event of a default. It is a pure method of investing in credit risk.
This is the first investment tool of this type, an easy access to these contracts. Skeptics think the proposed products are overly complicated. The ETFs will not appeal to everyday investors, while many advisors say they would not use them.
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