Advisers alarmed by ‘dangerous’ inverse ETF trend

Advisers have expressed concern at the rise in popularity of 'short ETFs' – products designed to track the inverse price of an index or underlying asset.

Of the six most-purchased funds on Ascentric for the month ending 16 December, five were short ETFs. One product, the DB X FTSE 100 Short ETF, was also the seventh most popular fund on Asecntric in the whole of 2011.

Adrian Shandley, managing director of Premier Wealth Management, called the trend for short ETFs "alarming".

Physical ETFs that track the price of an underlying index - for example, gold or a stock market - are a low cost way to access a market, he said. But short funds that do not physically hold the asset are too risky for most advisers.

"These kinds of investment always end in tears," he said. "If there is a rush on these products they won't be able to pay out because of liquidity problems. Overactive IFAs are trying to play the market, and you never win trying to do it."

Part of the danger of short ETFs is their leveraged position, said Malcolm Steel [pictured], a financial planner at Mearns and Company.

The profits on short ETFs rise exponentially with the fall in the asset. But conversely, a sharp rise in the asset would lead to big losses for the client.

"I think it is such a worry," he said. "The demand might be coming from the client, but more likely it is the IFA. I don't have any faith in the ability of an IFA to know the short-term direction of the market."

One possible explanation for the data may be the popularity on Ascentric for trading ETFs, said Shandley.

Dominic Ventham, head of marketing for Ascentric, said the trend may have been driven by discretionary advisers making a number of large trades, rather than smaller IFA firms.

Short ETFs are also usually hedged against other investments an adviser is making, he added.