As the Securities and Exchange Commission is moving quickly to impose new regulations on derivatives in mutual and exchange-traded funds, it is important to know that derivatives have become an important tool, said F. William McNabb II, president and chief executive officer of Vanguard Group.

Portfolio managers and transfer agents rely on derivatives to provide diversification, fund redemptions and value holdings, according to McNabb and State Street Global Advisors Senior Managing Director James Ross.

Just because a fund employs derivatives, it does not necessarily mean the fund is leveraging, McNabb said. And not all derivatives are created equal, adds Ross.

“If the SEC were to say ‘no derivatives,’ at an extreme, it would disrupt the management of funds and hurt shareholders,” McNabb told Investment News.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.