Buyer beware - Buyer beware...

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Buyer beware Al Kellett and Esko Mickels /  December 01, 2008 Recent years have introduced a host of exchange-traded funds (ETFs) that let investors access asset classes in cheap  and novel ways: iShares (Barclays) introduced funds of ETFs, Claymore launched a fundamental index fund, and  Horizons BetaPro (Jovian) gained popularity with its leveraged bull and bear funds. Investors have poured billions into ETFs. At the end of October, Morningstar’s database contained over 70 ETFs in  Canada with $16.2 billion under management. It’s tough to keep up with innovation, and the financial engineering  needed to create these complex products means investors don’t always understand the risks involved. This is the case with the Horizons BetaPro ETFs. A look at the recent performance of certain funds indicates something  isn’t quite right. For example, both the Bull and Bear versions of Horizons BetaPro Global Gold ETF – which are  supposed to be mirror images of each other – are down substantially this year. They clearly haven’t performed as  expected. A closer look reveals some inherent quirks that can lead to significant deviations from the underlying index. There are  different types of index funds and ETFs – those that hold the same underlying securities as the index, and those that  create a synthetic portfolio with a similar return through the use of derivatives such as futures, forwards, options and  swaps. In Canada, Horizons BetaPro is currently the only provider of leveraged and inverse-leveraged ETFs. These use 
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This note was uploaded on 09/18/2011 for the course RSM 330 taught by Professor Stapleton during the Spring '11 term at University of Toronto- Toronto.

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Buyer beware - Buyer beware...

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