The Growth of Global ETFs and Regulatory Challenges

Abstract

Exchange traded funds (ETFs) are one of the most innovative financial products listed on exchanges. As reflected by the size of the market they have become popular among both retail and institutional investors. The original ETFs were simple and easy to understand, however some recent products such as leveraged, inverse, and synthetic ETFs, are more complex, and have additional dimensions of risk. The additional risks, complexity, and reduced transparency have resulted in heightened attention by regulators. Concerns related to systemic risk and excess volatility, suitability for retail investors, lack of transparency and liquidity, securities lending and counter-party exposure, among others have been raised. These concerns are being addressed by a shift towards multiple counter-parties, over collateralization, disclosure of collateral holdings and index holdings. The appropriate regulatory and market reforms can ensure the continued success of ETFs.

Keywords: ETFs, Leveraged ETFs, Synthetic ETFs, Regulation, Systemic Risk

JEL Classification: G15, G18, G28