So I am positioned in inverse ETFs like SDS and FXP to profit from the next leg down in the market. BUT my worry is what happens to my investments in ETFs if the counterparty (financial institution that manages the ETF) fails! Will my profit be wiped out even if the market does go down?
Look what I found regarding currency ETFs:
September 18, 2009 (MarketWatch)
"Rydex's lineup of currency ETFs includes several funds with total assets in the range of $500 million, such as CurrencyShares Euro Trust, CurrencyShares Australian Dollar Trust , CurrencyShares Canadian Dollar Trust and CurrencyShares Japanese Yen Trust .
The ETFs are structured as grantor trusts and have expense ratios of 0.4%, and investors need to pay broker commissions to trade ETFs, since they are bought and sold like individual stocks.
They hold foreign currencies in overseas interest-bearing accounts, and their value is determined by the movement of that currency versus the U.S. dollar. The Rydex currency ETFs also pay a yield that is tied to local interest rates, minus fees. CurrencyShares pay interest income on a monthly basis, which is taxed as ordinary income. Meanwhile, any short-term or long-term gains in the ETFs due to currency moves are taxed at the ordinary rate up to 35%.
Morgan Stanley's Maister pointed out that investors in the CurrencyShares ETFs do not have FDIC insurance and therefore assume the credit risk of the depository bank, J.P. Morgan Chase .
So should JPM fail, and all that money that is short dollar in the ETFs above is wiped out, will it be supportive for the dollar?



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