A recent change in policy by the SEC could have a significant impact on the risk profile of some ETFs. In response to pressure from the industry, the SEC has lifted its moratorium on the use of derivatives by certain exchange traded funds. This move is expected to result in an increase in the number of actively managed ETFs. Active managers use derivatives to hedge risk. Managers can also use derivatives to speculate, which increases risk. So far, the SEC is keeping its moratorium in place for leveraged and inverse exchange traded funds.
The exchange traded fund universe is still small compared to mutual funds. There are 7,149 mutual funds and 1,444 ETFs. 6,836 mutual funds are actively managed. Only 54 ETFs are actively managed so far, but that may be changing (“Make Way for Active ETFs,” Wall Street Journal).
A significant issue for investors: the partial lifting of the derivatives ban could lead to a change of an ETF’s investment strategy and/or risk profile. Investors and their advisers should review any actively exchange traded funds they hold to see if there is a change in investment strategy, and, if so, whether they are comfortable with it.
Page Perry is an Atlanta-based law firm with over 150 years of collective experience maintaining integrity in the investment markets and protecting investor rights.