Pitfalls and Pipelines - Philippine Indigenous Peoples Links

Chapter 1.2: Financial Innovations and the Extractive Industries
61
Box 1: Tracking the Trades
Index Tracker funds and Exchange Traded Funds (ETFs) attempt to follow
the performance of a stock exchange share index itself, rather than outperform
it (as do traditional investment funds). Some trackers buy shares
in all the companies that make up the specific index (e.g., FT 100/500,
Dow Jones, and S&P 500). Others use complex financial instruments
to track what the index does by buying shares in a cross-section of
registered companies, such as those in mining.
It is important to note that all the global investment banks, which are
heavily invested in mining companies, now use ETFs as a key weapon in
their armories.
When markets rise, trackers are among the best “performers.” But, during
a bear (“sellers”) market, trackers begin to slip—though tending to do
better than many of the large popular funds favoured by small investors.
Trackers are typically run by very large fund management groups such as
the UK-based Fidelity, Scottish Widows, Legal and General, and HSBC.
There should be no discrepancy between the underlying value of the
units and the price quoted, while any dividends that come from holding
the shares in the portfolio are paid at regular intervals to the unit holders.
An Index tracking closed-end fund (aka Investment Trust) issues a fixed
number of shares, and may also issue subsequent tranches of shares to
raise additional capital.
ETFs are the most popular form of index tracking—a hybrid of an openended
unit trust (where the fund is divided into units which vary in price
in direct proportion to the variation in value of the fund’s net asset value),
and an investment trust.
There are now hundreds of ETFs which enable trading on virtually any
stock market “index” in the world, from the NASDAQ and the Malaysian
stock market, to Chinese stocks. They have “developed” to the point
that clients cannot only put their money into equities but into mineral
commodities themselves. This brand of ETFs has moved from investing in
precious metals (such as gold, silver and platinum) to speculating on base
metals. For its part, JP Morgan (by far the most significant commercial
bank involved in granting mining finance) recently proposed launching an
ETF based on the acquisition of huge amounts of copper.
This presented the alarming prospect of a “removal of all or substantially
all of the [copper] stocks in all of the LME warehouses in the U.S.,”
according to a U.S. law firm. According to the firm, if permitted, the