IFA warning as ETF Securities suspended
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The LSE said the instruments had been placed in a sustained auction phase due to disorderly market conditions as market-makers refused to quote for some exchange traded commodities backed by AIG.
The problems brought a warning to IFAs over the need to understand how an asset class works before investing.
ETF Securities' commodity-based products use financial instruments provided by AIG to track commodity prices.
The downgrading of AIG by Moody's and Standard and Poor's triggered losses in some ETCs as market-makers lost confidence and stopped offering prices on them.
Hargreaves Lansdown investment manager Ben Yearsley says: "No one wants to touch them at the moment. Effectively, market-makers stopped offering a price."
ETF Securities released a statement saying AIG was continuing to honour its agreement and was processing creations and redemptions as usual but acknowledged that some market-makers had stopped trading in the commodity securities backed by AIG.
Marlborough Fund Managers, which offers four retail funds of ETFs, says it was relatively unaffected.
Sales and marketing director Keith Ounsworth says its ETF funds have only marginal exposure to the ETF Securities instruments and managed to fully price their funds, with only a small negative effect.
He says: "Right now, people are worried about counterparty risk. If they are frightened of HBOS, they are going to be frightened of exchange traded funds."
Evolve Financial Planning director Jason Witcombe says exchange traded products may not be as simple as they appear: "They all seem well and good until you look under the bonnet.
"If you do not understand everything in the small print, you should not be investing in them."
Informed Choice joint managing director Martin Bamford says: "People assume that ETFs are simple index trackers but they can be underpinned by financial instruments from other companies."
