Amid all the worry about crooked brokers, futures-based ETFs come out smelling like roses, Teucrium’s Gilbertie says.
Peregrine Financial’s fraud-laden demise—the latest in a string of collapses of other brokerage firms in recent months—has brought into focus some of the risks investors may face when they put their dollars in the hands of smaller, independent futures brokers. Investors’ confidence in markets, in would appear, has taken another hit.
Sal Gilbertie, head of Teucrium Funds—an ETF provider offering futures-based commodities ETFs—told IndexUniverse’s Correspondent Cinthia Murphy that futures-based ETFs might be the answer to retail investors’ futures-related concerns. Gilbertie, whose firm sponsors the red-hot, $100 million Teucrium Corn Fund (NYSEArca: CORN), argued that the transparency of the ETF structure ensures that investors’ interests are guarded closely.
Murphy: Peregrine Financial’s demise comes less than a year after MF Global suffered the same fate. Refco preceded that. It’s a trail of scandal involving futures brokers that doesn’t reflect well on futures markets, or futures-based investments. What’s your view?
Gilbertie: The futures markets themselves are not broken. They are functioning as they should be. It would appear that the futures industry is having some problems— particularly, perhaps, some of the smaller futures commission merchants (FCMs). In my opinion some entities are going to have a tough time ahead.
Murphy: What makes fund providers like Teucrium immune to contagion from the negative publicity, or more importantly, from the apparent risks in the system? Where does the risk lie for an investor?
Gilbertie: I can only speak for Teucrium and what we do. There’s a lot of transparency in the publicly traded ETP system, something you don’t always see at the FCM level, as many of them are not publicly traded. As a NYSE listed security, any Teucrium ETP is subject to the SEC reporting requirements of a public company, including regular independent audits.
In the futures market, investors are protected by the clearing mechanism that backs-up their margin. Investors that leave excess margin in the hands of their FCM subject this excess capital to risk. Non-public FCMs are not subject to the same level of SEC required scrutiny and regulation that applies to publicly traded ETPs. The Teucrium family of NYSE funds sweeps its excess capital from our FCM on a daily basis.
Murphy: Should we assume, then, that in light of all that has gone down with Refco and Peregrine, investors will be less willing to leave excess capital sitting around? How would that affect the system?
Gilbertie: Professionals sweep their excess margin daily. Smaller investors may find it expensive and difficult to regularly sweep excess capital. As such, these investors may turn to professionally managed futures accounts or to publicly listed commodity-based ETPs that meet their investment objectives.