At this week’s Index Universe “Inside ETFs” Conference in Florida, some exchange traded fund providers revealed their increasing concern over the complex, synthetic ETFs and their perceived affect on the rest of the industry. Still, the business has yet to form a unified strategy, and regulators may be forced to make one for them.
Fund providers and regulators are both concerned that investors are holding ETF products they don’t understand, reports Jessica Toonkel for Reuters. There are 1,400 U.S.-listed ETFs and 900 future offerings filed with the Securities and Exchange Commission.
“I always worry about the reputation of the industry,” Bill Belden, managing director, head of product development at Guggenheim Investments, said in the Reuters article. “All it takes is one issue to create a shadow on the entire industry.”
There are reports that long-term investors have been holding leveraged and inverse ETFs, which were designed for short-term allocations. Last year, spurious reports cropped up that blamed leveraged products on the heightened market volatility, causing renewed speculation on more regulation.
BlackRock‘s iShares ETF business suggested a new ETF moniker system that would label derivatives-based ETFs as exchange traded instruments, or ETIs. [What’s in an ETF Name?]
“We want to make sure that ETF investors understand exactly what they own,” Darek Wojnar, managing director at iShares, said Monday in a panel discussion at the conference.
More recently, industry officials have been pondering a new system that would restrict the sale of complex ETFs to sophisticated traders. Some want brokerages to act as “gatekeepers” that limit trading to those who acknowledge their aptitude for holding such investment instruments while others contend that complex ETFs should be restricted to institutional or professional traders. Since fund providers can’t come ton an agreement, regulators may eventually be forced to step in.
Leveraged and inverse ETFs try to achieve their target performances on a daily basis through daily rebalancing, usually at the end of the day. Due to compounding issues from daily rebalancing, the funds won’t necessarily reflect their intend 2x, 3x or inverse targets over a long period of time. As such, leveraged/inverse ETFs are intended for short-term hedging or allocation purposes. [Leveraged and Inverse ETFs: What You Should Know]
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.