I'm not understanding this fund correctly. What prevents for some reason the etf to drop to $0 overnight, whats the 'backing' behind the shares?
The fund (symbol DBV) is long futures on 3 highest-interest and short futures on 3 lowest-interest G10 currency pairs, at 2:1 leverage, collateralized by 3-month T-Bills. While it can certainly sustain losses, how do you figure even a theoretical drop to $0, overnight or not, given those conservative parameters?
My worry is since its traded like a stock the market can simply decide to price it in anyway it wants. In case of futures arbitrage can bring the price to the 'true' valuation of the contract, if there is a disparity the 'take delivery' guys kick in and arbitrage it away but these etfs dont have that. You cant take delivery to the against the assets of the company issuing the etfs unless they go bankrupt in which case I bet the bondholders will get the money first
Well, if you're talking about this ETF trading at a major discount to its NAV all of a sudden... there are lots of risks here, but that's not a risk I'd be concerned with at all. No one needs to go bankrupt for the arbs to step in, i.e., buy DVB and simultaneously take an opposite long/short futures, or better yet, spot forex, position. The underlying assets (currency futures) are somewhat liquid and accessible on a 23/5 basis; their spot forex equivalents are far more liquid in size and accessible 24/5. Unlike, say, some Emerging Markets closed funds, where factors like liquidity restrictions and market access barriers make risk-free arb difficult or impossible, resulting in large premiums. See the DBV Prospectus, p. 19, risk (2): "Authorized Participants or their clients or customers may have an opportunity to realize a riskless profit if they can purchase a Creation Basket at a discount to the public trading price of the Shares or can redeem a Redemption Basket at a premium over the public trading price of the Shares. The Managing Owner expects that the exploitation of such arbitrage opportunities by Authorized Participants and their clients and customers will tend to cause the public trading price to track net asset value per Share closely over time."
Yes, but only by the Authorized Participants (broker/dealers, banks and other financial institutions). See p. 10.