Eureka Correspondence

Counterparty risks with ETFs

The article regarding ETFs is most enlightening (see Tony Rumble’s Boarding the ETFs boom) but there is one aspect which does not seem to be discussed. What are the counterparty risks associated with these products or funds? It might be interesting to identify any other risks that exist and how one might quantify them and where more information might be available.

Thanks for the many invaluable ideas received from your reports.

Chris Ostler

Tony’s response: The ETF story was designed to be a discussion of recent ETF trends and likely developments in the ETF market going forward.

For detailed background information regarding ETFs (eg structure, regulation, counterparty risks etc) you can check the ASX website, which has reams of detailed information.

Regarding counterparty risk, all ETFs must use a regulated “managed investment scheme” (MIS) structure including third party custodians to hold the assets which back the ETF.

On switching CBA for ANZ

In relation to John Abernethy’s article Ready to switch CBA for ANZ, I have no problem with the proposition of buying ANZ.

However, CBA is the only big bank with a June year end and an ex-dividend date in February. So for those chasing dividend, CBA should still have some attraction.

Generally speaking, in a bullish market, you would buy the banks a month or two before results for a run up to the results and the ex-dividend date. In which case you would have bought already or buying now or holding on to CBA.

TM

The resilience of dividends

I commend Scott Francis on his articles regarding the reliability of dividend income for investors (see his most recent, How franking pays off).

Scott’s research shows the resilience of dividends. The holy grail for retirees is an income stream that rises faster than inflation to maintain purchasing power in the face of often 30-year retirements. Over the long term, equities are the only asset class that have consistently provided this function to investors.

Long-term investors must remember the time period they are investing for, and watch the indicators that matter. The reliable growth in profits flowing from a company to investors is a far better gauge of the long-term economic health of a business than the price someone is willing to pay at any one point.

I think the call for more corporate profits to be returned to shareholders is long overdue. Warren Buffett eloquently expressed his opinions on retained corporate profits and coined it his “bladder theory”. I encourage people to look it up.

Name withheld