ETF Trends
ETF Trends

We would be remiss if we didn’t address some of the arguments a recent industry report makes about exchange traded funds (ETFs) and why they’re just flat-out incorrect.

The Kauffman Report basically dings ETFs, saying that they’ve made the markets worse, threatening their stability and impacting stock prices in the way they’re structured. Matt Hougan at Index Universe also gave a well-written rebuttal to the report’s arguments today.

The ETF industry has weighed in on the study. Invesco PowerShares‘ Managing Director Ben Fulton appeared on CNBC this morning to refute the study’s assertions.

Vanguard‘s Head of ETF Product Management Rick Genoni had this to say, “Our view is that the Kauffman Report is a sensational attack on ETFs and is factually incorrect on many fronts.  The report seems to conclude that ETF creations are done in cash when in fact, for the vast majority of products, securities are delivered in-kind through the creation redemption process.

“As far as claims that ETFs played a role in the flash crash, we agree with the SEC’s assessment that the flash crash was a market structure problem and not a product structure problem.  We further believe that ETFs are the model of transparency and that they play a key role in price discovery and market liquidity.  Claims around the impact ETFs are having on the ability of small companies to access capital are also completely unfounded.”

Among the points made in the report include:

ETFs are to blame for the May 6 Flash Crash, instead of high-frequency trading. This is not true. ETFs were a victim of the crash, not the cause, because underlying securities were mispriced. This forced authorized participants to widen the bid/ask spread in order to keep ETFs trading. Because ETFs trade like stocks, it’s important to understand that limit orders always trump market orders.

What’s more, ETFs have withstood extreme volatility in the markets in other periods, including the dot-com bubble in 2000, the housing crisis of 2007 and the credit crisis of 2008. Through all of these periods, ETFs delivered consistent price discovery for the markets and liquidity for investors who were seeking it.

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