ETFs: Collateral damage

If you buy an ETF you might reasonably assume the product holds investments in the index it is supposed to track. However, that is not necessarily the case and many funds do not hold anything as obvious as the constituents comprising the index. Instead they own something known as collateral. Collateral is a form of guarantee. Although it might sound like a complex, technical issue, collateral underpins the $131bn of assets in swap-based products in the European ETF universe, which represents 45% of the total industry according to BlackRock data. It also features in physically replicated...