European regulators are reportedly taking a greater interest in complex “synthetic” exchange traded funds they fear might not be fully understood by investors. One European regulator recently expressed concerns over the potential systemic risks from synthetic or leveraged ETFs that are based on derivatives such as futures and options.
Steven Maijoor, chairman of the European Securities and Markets Authority, notes that retail investors are buying more complex ETFs in an attempt to chase after higher returns, reports Boris Groendahl for Bloomberg BusinessWeek.
“We can see that more and more complex products end up in the hands of retail investors,” Maijoor commented. “That’s a concern for us.”
Maijoor singles out the new ETF varieties that are more complex than the traditional fund types, and as a result, the potential risks will need to be analyzed further, according to the report.
Britain’s Financial Services Authority and the Bank of England’s Financial Policy Committee have already issued a warning in the lack of transparency in this segment of the market. The ESMA also recently held a meeting to outline possible transparency guidelines. [European Regulators Push for More ETF Transparency]
“The classical ETF was a product where if you followed an index you would buy, let’s say, the most important stocks of an index and they would be your ETF,” Maijoor said. “There is now financial engineering” in creating synthetic ETFs, and “we think it needs to be closely looked at whether those new products are solid, are safe, and don’t have any stability issue.”
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.