Last week, Institutional Investor ran an interview with Wharton professor, Jeremy Siegel, who insisted ETFs have nothing to do with market volatility and systemic risk. It’s not an opinion that’s widely shared by regulators, especially as a US Congressional committee continues to debate the risks and issues emerging in the ETF space.
This week, they turn a more critical eye on ETFs, their increasing complexity and their use of derivatives and leverage. Here they quote another academic, Mark Zurack, professor of finance and economics at Columbia Business School who points out wisely that ETFs don’t always add value. In fact, there are now so many that the market is too crowded – “There are 1,000 ETFs and most investors can probably accomplish their goals with 10,” he says, adding, “What do you do with the other 990?”
It’s a good point, especially when you consider that the $1 trillion ETF industry is growing bigger by the second.
Zurack also agrees with other critics who say that some ETF products desperately need a new label – leveraged funds for example are more like swaps. “They really are leveraged swaps,” says Zurack. “They are not the same as ETFs in the U.S.” One of the big areas of focus is around commodity ETFs, which are hard to back with actual assets – these tend to be built around futures or other derivatives.
As the Congressional committee gets ready to release its report, the ETF industry will likely remain polarized over some of these key issues, especially as the market gets more competitive.