WASHINGTON – The glare on exchange-traded funds is set to intensify when a Senate committee puts the industry under the spotlight Wednesday.
ETFs – funds that track an index and can be traded like stocks – involve the investment of billions of dollars daily. After last week’s close, there was $1.04 trillion in ETF assets under management. The number of ETFs has grown by more than 19 percent in 2011, bringing the total number of funds to 1,344.
“The ETF industry is one of the few bright spots in the world of money management,” said Nicholas Colas, chief market strategist at ConvergEx Group in New York, in a research note Tuesday. “Limit those choices, and more capital is likely to leave markets, rather than reengage them.”
The Senate Banking Committee has called on leaders from the Securities and Exchange Commission, Nasdaq OMX Group, BlackRock’s iShares unit and the Ewing Marion Kauffman Foundation to testify at a Wednesday hearing that will examine the structure of the tradable funds.
According to Scott Burns, director of ETF research at Morningstar Inc., the funds performed “remarkably well” during the financial crisis.
“ETFs provide the lowest cost and most transparent vehicle for American and global investors,” Burns said. “People are looking for a scapegoat for why the markets just don’t go up, but there’s so much volatility that it’s hard to determine one factor.”
Others say ETFs play a role in the uneasy market climate and should not be overlooked in imposing regulatory oversight.
Michael Barr, former assistant secretary of the Treasury and a key architect of the Dodd-Frank banking reform law, said ETFs might contribute systemic risk to the financial system.
“ETFs are derivative instruments that have some of the same attributes of mortgage-backed assets that caused the financial crisis in 2008,” Barr said.
While he believes ETFs are an important vehicle for retail investors, Barr noted that institutional investors – professionals who trade significantly higher quantities and dollar amounts – tend to use ETFs as riskier, highly leveraged instruments.
Some ETFs provide double or triple the exposure to a given index, and moves taken by those funds can lead to volatility, some critics say.
“It would be good for the SEC to take a cold, hard look at reform,” Barr said.