The Securities and Exchange Commission has launched a general review of exchange trade funds, including the adequacy of disclosures made to investors. The U.S. Senate also held hearings last week examining exchange traded funds. These come amidst growing concerns that exchange traded funds are generating 35-40% of the exchange trading volume and playing a significant role in the extreme volatility of the stock market.
The nominal value of exchange traded funds is $1.4 trillion worldwide and $954 billion in U.S.-based funds. Individual investors hold half of that. The total global stock, bond and commodity markets are estimated at $130 trillion, and conventional stock and bond mutual funds hold $9 trillion, according to the article.
Leveraged, inverse leveraged, niche, and synthetic exchange traded funds are the focus of the SEC’s review and Senate hearings. They have been called “weapons of mass destruction” that present systemic risk concerns, as well as extreme risks to individual investors.
According to Howard Gold’s No-Nonsense Investing column for MarketWatch, “Leveraged ETFs are the worst investment ever.” They are designed for day trading and hedging by hedge funds and computer-driven high-frequency traders. Investors are long-term oriented and mistakenly believe that these high-risk speculative products are too.
“Because of this, I think it is time for regulators to impose stricter suitability standards on these vehicles for individual investors, especially in retirement accounts ? and if I thought it would work, I would support banning them entirely,” said Gold.
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