ETFs aren’t derivatives
Herb Greenberg misreads the SEC flash-crash report, in an attempt to justify his silly claim that ETFs are derivatives. I agree with Herb that there are serious questions which should be asked about ETFs, especially ones which include small-cap stocks. You can’t turn an illiquid stock into a liquid stock just by throwing it into an ETF, and illiquidity is one of those things which goes hand-in-hand with volatility and attempts at price manipulation.
But that doesn’t mean that ETFs are derivatives. They’re not.
Herb quotes this bit of the SEC report:
The E-Mini and SPY are the two most active stock index instruments traded in the electronic futures and equity markets. Both are derivative products designed to track stocks in the S&P 500 Index, which in turn represents approximately 75% of the market capitalization of U.S.-listed equities.
There is a way in which this is true, but it’s best read as a slightly clumsy attempt to lump the E-Mini and the SPY together with some inartful phrasing.
The E-Mini is a derivative product by dint of being a derivative. It’s a futures contract, a zero-sum game, an instrument whose value at expiry is a wholly transparent function of the value of some other financial instrument.
The SPY, by contrast, is a derivative product only by dint of the fact that it’s a product — a security, not a derivative — which is derived from aggregating 500 different stocks. You couldn’t have the SPY without the S&P 500, so in that sense the SPY is derived from the S&P 500. But if you own shares of SPY, you have real wealth: real claims on real assets of 500 real companies in the real world. more....http://blogs.reuters.com/felix-salmon/2010/10/01/etfs-arent-derivatives/
