From the December 2011 issue of Research Magazine • Subscribe!

Senators Scrutinize ETFs

The expanding world of ETFs made its way to Capitol Hill on October 19, with a Senate Hearing titled “Market Microstructure: Examination of Exchange-Traded Funds (ETFs).” The purpose of the meeting was to analyze the impact of ETFs on the financial markets.

Senator Jack Reed, (D-R.I.) led the ETF hearing, which featured a panel of four financial experts. Sen. Mike Crapo (R-ID), originally scheduled to attend, was not present.

ETFs have recently been blamed for increased stock market volatility, particularly toward the daily market close.

“Over the past year, research shows the S&P 500 moved in lockstep with its stocks more than 86 percent of the time. The idea is that the index should move differently than the component stocks individually,” said Harold Bradley, chief investment officer, Ewing Marion Kauffman Foundation. “This is remarkable and unprecedented, reminding us of the 1987 crash.”

Bradley also complained that, “ETFs are stretching the idea of what represents an index.”

Disagreements among the panelists about the role and effect of ETFs on the financial markets were notable, especially with Bradley taking a hard line view against ETFs. 

“We have not seen any signs that either leveraged ETFs or ETFs in general add volatility to the marketplace during the day or at the close,” stated Eric Noll, executive vice president of transaction services at NASDAQ OMX.

The amount of assets invested in U.S. long and long-leveraged ETFs is $431 billion, which far exceeds the $13.5 billion invested in U.S. short and short-leveraged funds.

Regulators are debating whether to place more restrictions on ETFs, particularly those that use derivatives to track the performance of their underlying benchmarks.

At end-September, U.S.-listed ETFs and ETNs accounted for around $1 trillion in assets. •

 

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