A major regulator looks to investigate the rapidly expanding industry
A report from the Financial Times has revealed that the US Securities and Exchange Commission is preparing to review the ETF industry in light of concerns that massive inflows into the space may be exacerbating volatility in financial markets.
ETF research authority ETFGI has reported US assets in ETFs at US$2.4 trillion at the end of Q3 2016; globally, ETF assets were at $3.3 trillion. An estimate from Credit Suisse pegs their contribution to the value of all US shares traded at 30%. In August 2015, more than 1,000 securities were suspended for trading for sharp moves, and some ETFs deviated wildly from their net asset values.
The SEC has done “bits and pieces” of examination, said a person familiar with the matter, but is anticipated to scrutinize every aspect of the industry and ramifications of its expansion. Another source reported the creation of an ETF working group, which consisted of at least a dozen people from across the SEC’s divisions, about a year ago. Issues to be examined vary, ranging from the implications of ETF flows dictating an ever-increasing share of the US stock market, to structural concerns around ETFs that track bonds.
The meteoric rise towards passive investment products like ETFs has been accelerated by dissatisfaction with mutual funds, which has been driven by their underperformance and high fees. Although newer incarnations of ETFs offer “smart beta,” promising portfolio rebalancing and diversification based on specific investment factors, most ETFs only seek to replicate the return of a market, like US stocks, bonds, or oil.
Many have benefited from the speedy growth of ETFs, which allow them to spread their investments more cheaply, but the increasing size and complexity of the industry has raised concerns. SEC Chair Mary Jo White expressed as much in a speech she delivered in May, where she highlighted the industry’s “astounding” growth and hinted at a wider examination of its implications.
“The SEC has taken a number of initial actions to share our thinking on these issues, and further regulatory steps beyond additional disclosures may be needed to address some of these issues,” she said.
Related stories:
Are smart beta ETFs about to collapse?
Is there an excess of ETFs on the TSX?
ETF research authority ETFGI has reported US assets in ETFs at US$2.4 trillion at the end of Q3 2016; globally, ETF assets were at $3.3 trillion. An estimate from Credit Suisse pegs their contribution to the value of all US shares traded at 30%. In August 2015, more than 1,000 securities were suspended for trading for sharp moves, and some ETFs deviated wildly from their net asset values.
The SEC has done “bits and pieces” of examination, said a person familiar with the matter, but is anticipated to scrutinize every aspect of the industry and ramifications of its expansion. Another source reported the creation of an ETF working group, which consisted of at least a dozen people from across the SEC’s divisions, about a year ago. Issues to be examined vary, ranging from the implications of ETF flows dictating an ever-increasing share of the US stock market, to structural concerns around ETFs that track bonds.
The meteoric rise towards passive investment products like ETFs has been accelerated by dissatisfaction with mutual funds, which has been driven by their underperformance and high fees. Although newer incarnations of ETFs offer “smart beta,” promising portfolio rebalancing and diversification based on specific investment factors, most ETFs only seek to replicate the return of a market, like US stocks, bonds, or oil.
Many have benefited from the speedy growth of ETFs, which allow them to spread their investments more cheaply, but the increasing size and complexity of the industry has raised concerns. SEC Chair Mary Jo White expressed as much in a speech she delivered in May, where she highlighted the industry’s “astounding” growth and hinted at a wider examination of its implications.
“The SEC has taken a number of initial actions to share our thinking on these issues, and further regulatory steps beyond additional disclosures may be needed to address some of these issues,” she said.
Related stories:
Are smart beta ETFs about to collapse?
Is there an excess of ETFs on the TSX?
