iShares' Cavatoni voices concern about complex ETFs

iShares, Barclays Global Investors' exchange-traded fund (ETF) unit, has not launched leveraged or inverse ETFs due to worries about whether investors properly understand how they work, says Joseph Cavatoni, managing director of the newly formed iShares Capital Markets unit for Asia-Pacific in Hong Kong.

"Our concerns with such products lie in the challenge many investors may face in understanding the effects of daily leverage rebalancing on longer-term returns," he adds.

Cavatoni joins a growing number of those who have warned investors about potential issues with such products. They include other asset managers, such as Fidelity Investments, and US regulators the Financial Industry Regulatory Authority and the Securities & Exchange Commission.

The majority of ETFs on the market follow the traditional model -- tracking an underlying equity or bond index. But as the benefits of the ETF structure become more widely accepted, inflows from increasingly sophisticated investors have created a demand for increasingly complex funds, says Chicago-based information provider ETF Database.

"iShares believes innovation means good ideas can actually be delivered successfully to clients and can be used effectively by clients," says Cavatoni. "Not all good ideas can be delivered correctly or are capable of being used effectively by many potential clients. That is why we choose not to develop some products, while bringing others to market that deliver to investors' expectations.

"Our product development philosophy is to find the best way to deliver solutions," he adds. "We aim to develop products that clients truly need, while avoiding investment fads or products capable of being used effectively by only a small number of clients."

Cavatoni joined from UBS in June to head up iShares Capital Markets in Hong Kong, which complements existing teams in the US and in Europe. The Asia group will work closely with iShares participating dealers and market-makers across the region to ensure liquidity and competitive pricing for iShares ETFs.

The team expanded last week with two new directors, David Mann and Leslie Chiu. Mann moved from LaBranche Structured Products, where he was managing the domestic and international ETF portfolios in a proprietary market-making capacity. Chiu was previously a senior trader at Ward Ferry Management, an Asian long/short equity hedge fund, executing all orders for Asia-Pacific markets, including Japan and India.

iShares Capital Markets will focus on iShares counterparty management and client service, including market-making activities, broker-dealer education and thought leadership with respect to iShares trading and analytics. The team will also work with iShares clients on best-practice execution strategies while partnering with participating dealers to ensure good value for clients during the trading process.