The Securities and Exchange Commission is investigating whether exchange-traded funds contributed to the turmoil on stock markets last month, according to the Wall Street Journal.
The newspaper wrote that the US regulator has had discussions with ETF-trading firms in an attempt to find out the products' impact on the recent market volatility. The story is attributed to “people familiar with the talks,” but the SEC declined to comment.
BMO Financial Group said earlier this week that its ETF business passed $3 billion in assets under management less than two and a half years after the business was launched, and that the business has doubled this year alone, demonstrating the fast growth ETFs have experienced.
Because many ETFs are cheap, tax efficient and easy to trade, some argue that they are genuinely beneficial. But they are also known for frequently changing in value. For that reason, they have been criticized for not living up to client expectations because of their increasing complexity and profusion. In June, the UK's Financial Services Authority criticized providers for not properly explaining the risks they entail.
Some observers have even suggested a link between ETFs and the “flash crash” in May last year, when 70 per cent of all cancelled trades were reported to be ETFs.
Russell Wild, a financial planner in Allentown, Pennsylvania and author of Exchange Traded Funds for Dummies, encourages investors to tread with caution when dealing with the products as most of them are fairly new and untested.
Tom Stevenson from Fidelity International has previously described ETFs as a potential minefield for the average investor and putting market stability at risk. He argues that they are best left to sophisticated investors with an understanding of the operation and risks of the product.