Counterparty Risk May Be Worth The Return
There are all kinds of risk and I think we’ve learned a lot of lessons about that. There is your investment risk and that’s what I think everybody was very focused on prior to the financial crisis, right. That’s whether or not your stock or bond will go up or down, right, whether it appreciate in price, that’s investment risk.
But we also have counterparty risk, and I think that’s something that we’ve taken for granted, that we really got our eyes opened to during the 2008-2009 credit crisis: on the other side of every investment, of every financial transaction, as a counterparty. Our faith in our system has been shook a little bit by what is the – are they going to make good on that bet on the other side? That if I buy a derivative from you and I need to cash it in, that you’ll still be solvent and you’ll still be able to make good on that. So, counterparty risk is something that’s very much in focus. Again, risk is very simple; it’s whether or not I’m going to get my money.
So how does that relate to ETFs exactly? See the full “Morningstar” interview below: