Inverse, or leveraged ETFs have also been put under the spotlight because of their use of derivatives to pump up bets. These instruments “corrupt the markets by exacerbating price trends” both up and down, Doug Kass of Seabreeze Partners said in a previous article on Real Money. Both the SEC and FINRA have held investigations to find if these funds are to blame, as well as the U.S. Senate subcommittee. [Leveraged or Inverse ETFs: What You Should Know]
Most of all, the ETF industry is still small in comparison to stock futures and options. “They’re too small to have outsize effects in the $17 trillion U.S. equity market,” Jason Hsu of Research Affiliates said.
As far as market volatility, who or what is to blame? Cendrowski proposes that it could be agitated investors reacting to the European debt crisis, weak U.S. economy and slowdown in emerging markets. Morningstar analyst Michael Rawson reports that company profits could also be driving the mania. During periods of higher earnings volatility, stock volatility is known to spike. There is simply not enough proof that ETFs are the root of the problem. [Are Rising Correlations Affecting ETF Correlations?]
Tisha Guerrero contributed to this article.