Exchange traded funds will be in the spotlight Wednesday as a Senate subcommittee holds a hearing on ETFs and their impact on market structure.
The subcommittee will explore whether ETFs are contributing to market volatility and if they present systemic risks to the financial system, among other issues, reports Index Universe.
Leveraged ETFs in particular have faced allegations that they are exacerbating the daily swings in the stock market.
Late last week, CNBC’s Herb Greenberg reported “proof” that these high-octane ETFs “create an artificial market for the stocks they own.”
However, experts point out that leveraged and inverse funds represent only a small portion of overall ETF assets. [Do Leveraged ETFs Really Exacerbate Volatility?]
ETFs, which are baskets of securities that trade like individual stocks, hold over $1 trillion in assets and continue to see inflows.
“The concern that some market participants and Congress both seem to share is whether these two facts – ETF growth and market volatility – are merely correlation or actually causation,” said ConvergEx Group Chief Market Strategist Nicholas Colas in a note Tuesday.
“A quick scan of the commentary on ETFs will leave you with as many impressions of the answers to these questions as there are people offering opinions,” he added. “At their core, I suspect, is a suspicion that the growth of ETFs and the perceived skittishness of stock markets MUST have some relationship.”
Leveraged and inverse ETFs comprise 3.6% of the industry’s total assets.