(Bloomberg) -- BlackRock's Laurence D. Fink, who oversees the worlds biggest exchange-traded fund lineup, said leveraged ETFs are a structural problem and have the potential to blow up the industry.
BlackRock would never do a leveraged ETF, Fink said in a question-and-answer session with Deutsche Bank AG co-chairman Anshu Jain today in New York. Fink said he doesnt understand why the U.S. Securities and Exchange Commission allows them to operate.
ETFs, which have turned into one of the most popular investing vehicles over the past decade, have become increasingly complex as firms try to appeal to a more diverse base of investors. While the majority of ETFs mimic indexes, leveraged versions use swaps or derivatives to try to amplify daily index returns. Leveraged and inverse ETFs have came under scrutiny over several issues since 2009, the year the SEC warned brokers and investors that the vehicles werent appropriate for long-term investors.
Fink said today that products with embedded leverage should be supervised. Regulators should focus their efforts on products instead of the amount of assets managed when seeking to reduce risk in the financial system, he said. BlackRock is among large money managers that has been lobbying regulators and lawmakers to avoid being labeled a systemically important financial institution, or SIFI.
We still need a safer and sounder market, he said.
The SEC examined whether ETFs contributed to equity-market volatility in 2010 and the 8.6% intraday plunge in the Standard & Poors 500 stock index on May 6, 2010, known as the flash crash. The International Monetary Fund has said that European ETFs that generate returns through derivatives, synthetic ETFs, add a layer of complexity and risk to financial markets.
BlackRock, which owns the iShares family of exchange-traded products, has proposed that regulators enforce a new categorization regime with clearer labeling and risk disclosures to help individual investors. In 2011, Fink compared the development of hard-to-understand ETFs to financial engineering in the mortgage-backed securities market, which played a key role in the 2008 financial crisis.
BlackRock is the worlds biggest investment firm, with $4.4 trillion under management in everything from open-end mutual funds to private hedge funds.
Register or login for access to this item and much more
All Financial Planning content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access