Exchange traded funds are being unfairly blamed for volatility, rising correlations and other problems in the market, according to industry analysts and top executives.
ETFs are facing higher scrutiny as the business continues to gain ground versus traditional mutual funds and as the financial products account for a growing percentage of equity trading volume.
ETFs have helped “level the playing field” but up until recently, there seemed to be the perception that they could do no wrong, said Don Phillips, president of fund research for Morningstar, at the firm’s recent ETF Invest conference.
Although Morningstar “truly believes” in ETFs, Phillips said there were “blind cheerleaders” for the financial products, which are baskets of securities that trade on exchanges like individual stocks. Their advantages include daily liquidity, low fees, tax efficiency and transparency.
Now, however, sentiment on ETFs has swung in the opposite direction, Phillips noted.
They have become “almost a boogieman” for everything that people don’t understand in financial markets and the subject of “senseless overstatements.”
In fact, Morningstar has produced data refuting claims that leveraged ETFs are contributing to recent market volatility. [Do Leveraged ETFs Really Exacerbate Volatility?]
Recent trading scandals at UBS and Societe Generale have involved traders at so-called Delta One desks, which trade equity swaps, futures and ETFs.
At the Morningstar conference, top executives at Vanguard, State Street and BlackRock’s iShares expressed frustration that ETFs are being scapegoated for issues in the markets.
“Some of the allegations are so wrong on so many levels,” said Sue Thompson, head of BlackRock’s registered investment advisor group and 401(k) sales. She added the business needs to step up its education efforts.
Rick Genoni, head of Vanguard’s ETF product management department, said index strategies such as futures contracts have been leveraged for years. He said macroeconomic trends are driving market correlations higher, rather than ETFs, as some allege. Also, the trading scandals are the result of risk-control failures rather than a problem specific to ETFs.
“ETFs are not causing correlations to rise,” said Tony Rochte, head of the North American intermediary business group at State Street Global Advisors. “These are historic times,” Rochte said, pointing to the near-collapse of the mortgage market in 2008, followed by corporate balance sheet issues and now the sovereign debt crisis. [Sector ETF Correlations Highest Since Financial Crisis]