Passive investors beware

SINGAPORE (June 4): Investors should be aware of the risks when it comes to investing in exchange-traded funds (ETFs) and notes (ETNs), especially those that track derivative products, say industry experts.

Jackie Choy, Morningstar director of ETF research in Asia, says this is the crucial lesson from the US market correction in February, when the ­VelocityShares Daily Inverse VIX Short-Term ETN (XIV) plunged more than 80% in a single day and was subsequently liquidated. The XIV provided returns when the markets were calm as it provided the opposite returns of the CBOE Volatility Index.

As a result, many investors suffered massive losses when the US market’s volatility spiked due to investor concerns about the higher-than-expected inflation rate. At the time, the Dow Jones Industrial Average dropped as much as 10% while the financial markets globally were mostly in the red.

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