Is there actually a “safe investment” in all of this chaos that investors can turn to when CDs, money markets and exchange traded funds (ETFs) all seem to be vulnerable?
In general, the money invested in traditional stock exchange-traded funds appears safe from rampaging credit markets; not safe from market movements, of course, but safe from the kind of credit risks that killed the Lehman ETNs, reports Matthew Hougan for Index Universe.
For example, the investment into iShares S&P 500 Index Fund (IVV) is like buying a sliver of of each of the 500 stocks held by those funds. This is different than an ETN, where you are buying a debt note from the underwriting bank.
Fixed-income funds operate much like traditional equity ETFs, in which investors hold a pro-rata share of the underlying markets. All such funds are exposed to the risks of the fixed-income market, which include defaults and even illiquidity.
Precious metals funds are very safe, Hougan says, as they hold the metals as their sole asset. The metal is stored in a vault with a custodian bank, and while there are scenarios in which the holdings could be lost, they’re extraordinary. Most currency ETFs hold the currency as their sole asset, meaning that they’re essentially bank accounts that come with all the rights and risks of other bank accounts.
ETFs have been scrutinized as of late and one of the biggest questions has to do with tracking error. Most of the tracking error presented is actually a positive thing, says Jim Wiandt for Seeking Alpha.
Much of the tracking error occurring now is due to cash being king right now, share lending, managing cash flow, and index changes. The more cash at hand, the more positive tracking error you get in your ETFs for the moment.