Few fireworks flew at the ETF hearing in D.C., and the takeaway is that more transparency is on the way.
The fast-growing world of exchange-traded funds came under close scrutiny this week at a U.S. Senate subcommittee hearing, where panelists were in broad agreement that U.S. regulators ought to require that ETFs be as transparent as possible.
Noel Archard, a managing director at the world's biggest ETF firm, iShares, and Harold Bradley, chief investment officer at the nonprofit Kauffman Foundation, were among those testifying at the U.S. Senate Banking subcommittee hearing, “Market Microstructure: Examination of Exchange-Traded Funds (ETFs).”
Archard and the other two panelists—the Nasdaq exchange’s Eric Noll, and Eileen Rominger, the director of the Securities and Exchange Commission’s Investment Management division—generally agreed that ETFs aren’t to blame for all the volatility in the markets in the past few months.
Those opinions were highly topical to the extent that that hearing took place at a time of wild fluctuations in the stock market and lingering concerns that another “flash crash” may be possible. Many question whether ETFs—particularly leveraged and inverse ETFs—are playing a crucial role in driving increased market volatility. Others worry that short-selling in the ETF market represents a systemic risk.
The Kauffman Foundation’s Bradley, co-author of two recent research reports taking a critical view of ETFs, served the most pointed and colorful comments in the hearing, as was widely expected. Reiterating topics in the two papers, Bradley said ETFs represent a risk to the functioning of modern equity markets.
“At the very least, the SEC should begin a broad inquiry into the nature and magnitude of these impacts and risks with a view toward improving its own and the public’s understanding of the marketwide impacts of these financial instruments,” Bradley said in his testimony.
The Senate Banking, Housing, and Urban Affairs subcommittee hearing was chaired by Jack Reed (D-RI).
Casino On Steroids?
Reed, the only member of the subcommittee present at the hearing, noted that critics of ETFs have labeled them “new weapons of massive destruction that are turning the market into a casino on steroids.”
Reed’s opening remarks set the stage for the general tone of Bradley’s comments.
“As is well known, modern stock markets are geared instead to day traders, hedge funds and other short-term investors. Add to that list a modern ‘innovation’: exchange-traded funds (ETFs), which may be more dangerous than all the preceding factors combined,” Bradley said.
It was clear the other panelists didn’t share Bradley’s concern—or at least the extent of it. While calling for greater disclosure and transparency, they emphasized that ETFs are among the most cost-efficient and tax-efficient investment vehicles.
The SEC’s Rominger, for example, said that while the commission remains committed to insuring investors are properly protected, its inquiries so far haven’t led the SEC to the conclusion that ETFs are roiling the markets.