AIG Collapse Hits ETF Investors

10-10-2008 | Source: euromoney.com - Click here to take out a FREE Trial

The near-death experience of AIG has raised the issue of credit risk everywhere, including the homes of ETF investors who thought they had no direct exposure.

Owners of exchange traded funds linked to the insurer’s popular commodity indices were surprised to learn that the downgrading and near collapse of the insurer would have implications for them too, as ETFs are supposed to bear only the credit risk of the issuer, with AIG merely the sponsor of the index their products follow.

AIG’s troubles, however, spilled over as market makers of the ETFs abandoned trading in the funds sold as equity instruments and traded on stock exchanges for a week, even after the announcement of the US government’s $85 billion bail-out....

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