The ETF industry is very exciting and the pace of innovation has been startling. This has all been made possible because of the relative cost savings over mutual funds as well as the sheer enthusiasm that seems to greet every launch. Investors have taken to high-concept Exchange Traded Products like Sarah Palin to a passing-through NBA player.
But with innovation and excitement and enthusiasm comes sloppiness and reaching. And so it is nice to see one of the largest players in the industry advocating for a set of standards…
From Investment News:
BlackRock Inc., which controls 42% of the exchange-traded-fund market, is calling on the industry and regulators to raise the bar in terms of both transparency and regulatory oversight.
While the report issued by the company today includes five areas of recommended reform, BlackRock has placed particular emphasis on a reduction in the use of synthetic strategies that don’t hold the underlying investments.
The reliance on derivatives and futures contracts to replicate the exposure of an index or asset class introduces risks associated with “mis-tracking as well as counterparty risks,” according to Jennifer Grancio, managing director and head of BlackRock’s iShares U.S. distribution.
My general rule with these things for my own practice is that an ETF is almost always preferable to an ETN and that if there are swaps or derivatives being employed to express a trade in a given product, then for me it must be a trade and not an investment (meaning a shorter-term hold).