The statements by Mary Jo White, chair of the Securities and Exchange Commission, were the frankest warning yet that the agency could tighten regulation of the funds.
The funds, which typically track a stock or bond index and are traded like stocks, have more than quadrupled in number over the last decade. They now have a total of $2 trillion in net assets, according to the Investment Company Institute, a trade group.
In January, the SEC said it would examine the funds for compliance with securities laws.
Price Disparities During ‘Flash Crashes’
In addition, the SEC's staff has analyzed the 2010 "flash crash" and the wild market swings of Aug. 24, 2015, with an eye toward disparities between prices for index ETFs and equities, White said.
"Despite the popularity and broad success of these funds, their history is not without some turbulence," White said at an asset manager meeting hosted by the ICI.
"Further regulatory steps beyond additional disclosures may be needed," she added.
In February, Commissioner Kara Stein, a Democrat, called for heightened scrutiny.
The commission's staff has also analyzed the roles of market makers in operating and trading ETFs, the interconnectedness of the funds' prices and portfolio holdings, sales practices and investors' understanding of the funds, White said.
The industry has felt pressure since the commission proposed a rule in December to clamp down on how investment funds use derivatives, with some exchange-traded funds saying they would have to close or change their investment strategies if the rule is approved.
White, though, said the rule was intended to "provide an updated and more comprehensive approach to regulating funds’ use of derivatives in light of the significant growth in the volume and complexity of derivatives over the past two decades and the increased use of derivatives by certain funds."
Most of the criticism of the proposal has revolved around portfolio limitation, she said. A fund would have to comply with a portfolio limitation on either exposure to or risk from derivatives under the proposal.