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The Collateral Risk of ETFs

Author

Listed:
  • Perignon , Christophe
  • Yeung , Stanley
  • Hurlin, Christophe
  • Iseli, Grégoire

Abstract

As most Exchange-Traded Funds (ETFs) engage in securities lending or are based on total return swaps, they expose their investors to counterparty risk. To mitigate the funds' exposure, their counterparties must pledge collateral. In this paper, the authors present a framework to study collateral risk and provide empirical estimates for the $40.9 billion collateral portfolios of 164 funds managed by a leading ETF issuer. Overall, our findings contradict the allegations made by international agencies about the high collateral risk of ETFs. Finally, the authors theoretically show how to construct an optimal collateral portfolio for an ETF.

Suggested Citation

  • Perignon , Christophe & Yeung , Stanley & Hurlin, Christophe & Iseli, Grégoire, 2014. "The Collateral Risk of ETFs," HEC Research Papers Series 1050, HEC Paris.
    • Handle: RePEc:ebg:heccah:1050
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    Cited by:

    1. Itzhak Ben-David & Francesco A. Franzoni & Rabih Moussawi, 2016. "Exchange Traded Funds (ETFs)," Swiss Finance Institute Research Paper Series 16-64, Swiss Finance Institute.
    2. Adam Marszk, 2016. "Impact of Innovative Financial Products on Financial Systems: Exchange Traded Products and the Polish Financial System," International Economics, University of Lodz, Faculty of Economics and Sociology, issue 14, pages 114-132, June.

    More about this item

    Keywords

    Asset management; passive investment; derivatives; optimal collateral portfolio; systemic risk;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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