Federal Reserve chairman Jerome Powell recently came out in stating ETFs were not the main reason behind the market correction earlier this month.
“We looked after the volatility came and then subsided. We looked carefully to try to understand really what did happen, and it seems like the markets were generally orderly through almost all of that time,” Powell said Tuesday in response to a question during his testimony to the House Financial Services Committee. “ETFs are a particular form of fund, and I don’t think they were particularly at the heart of what went on, on those days.”
Despite the benefits of the ETF investment vehicle, a number of naysayers are concerned that ETFs contribute to increased volatility, especially during periods of heightened market upheavals when institutional-sized ETF traders redeem large basket of shares.
Earlier in February, the S&P 500 officially dipped into correction territory after falling more than 10% from its record January highs, but it has pared more than half of its lasses in recent weeks. Traders have blamed the pullback on rising worries over inflationary pressures and a potentially quicker-than-expected interest rate hike out of the Federal Reserve, CNBC reports.
Meanwhile, certain securities that resemble ETFs, notably exchange traded notes, were under the microscope after some traders argued that popular ETNs tracking the CBOE Volatility Index fueled additional volatility in the markets and exacerbated the sell-off.
Nevertheless, Powell did acknowledged that the Fed is working with other agencies to further investigate ETF’s potential risk to the markets as the investment tool is relatively new in financial system.
“But it’s something we’re talking to our fellow agencies [about], particularly the SEC, I think, would be best positioned to look at this. It’s a question we’re looking into,” Powell added.
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