The Collateral Risk of ETFs

Christophe Perignon (), Stanley Yeung (), Christophe Hurlin and Grégoire Iseli ()

No 1050, HEC Research Papers Series from HEC Paris

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.

Keywords: Asset management; passive investment; derivatives; optimal collateral portfolio; systemic risk (search for similar items in EconPapers)
JEL-codes: G20 G23 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2014-08-10
New Economics Papers: this item is included in nep-ban and nep-rmg
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:1050

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