2011 was an exciting year for ETFs – the industry entered the year having passed $1 trillion in global assets and at iShares, we launched 14 new products in the United States.
But it was also filled with a great deal of confusion and misinformation. ETFs were portrayed in the headlines as the boogeyman, responsible for everything from market volatility to rising market correlations. In times of uncertainty investors want answers and explanations, but unfortunately sometimes the ones they are given aren’t always correct.
That is why I made it a priority to do some mythbusting on our blog, addressing the misperceptions that can surround our industry.
Take this summer, when volatility rocked the stock markets. I began to hear from numerous investors who were worried about how ETFs might react or that they could be the cause of the volatility. But in volatile markets, the benefits of ETFs can become the most apparent, as I explained in this blog: ETFs in volatile markets.
On the blog I also addressed the practice of lending securities within an ETF and synthetic ETF considerations. I tackled concerns raised in various articles and blogs that ETFs with high levels of short interest can cause a tremendous “short squeeze” for either the ETF itself or for the securities held by the ETF. (For the record, a short squeeze is less likely to occur in an ETF than in a single stock)
As ETFs were being blamed by the media and bloggers for everything from rising correlations to market volatility, I headed to Washington, DC in October to testify in front of a Senate subcommittee. The hearing gave me an opportunity to address some of the complaints being leveled at the industry and to lay out the reforms that BlackRock is advocating in the way exchange traded products (ETPs) are labeled and reported.
While the first ETFs were straightforward, tracking relatively broad benchmarks like the S&P 500, in the past few years, sponsors have introduced newer products that are much more complex and carry greater risk to investors.
We are advocating the creation of a separate label for leveraged and inverse funds as well as products that are backed principally by derivatives rather than physical holdings. For instance, we propose that any fund that is backed by the credit of its issuer be labeled an Exchange Traded Note, while funds that hold physical commodities fall under the label Exchange Traded Commodity.
To be clear, I think it’s important that other voices in the industry engage in this debate. Different products provide value for different clients — a classification system doesn’t say whether a product is “good” or “bad”, it doesn’t tell you if you should hold it for the long-term or short-term. It simply gives the investor another opportunity to pause before they hit the buy button to ensure they understand what they are owning, which is the most important aspect of any investment program.
The ETF marketplace is entering a new era of increased scrutiny. We welcome this attention and, as I told lawmakers, it’s incumbent on our industry and its regulators to ensure that investors who purchase ETFs — and any financial products – know what they are buying and appreciate the risk and costs associated with those products.
Now that the conversation between the industry, lawmakers and regulators has started, I hope it continues into 2012 and that the industry moves toward improved disclosure and transparency.