Regulators Turn To The Stability Risks Presented By The Explosive Growth Of Exchange-Traded Funds

Global regulators have raised concerns over the increased prevalence of exchange-traded funds ("ETFs") as investment vehicles, as well as the new uses to which these vehicles are being put. The Financial Stability Board ("FSB"), which is a global coordination organization of the world's financial regulators, published a report detailing its concerns in April 2011.¹ The Bank for International Settlements and the International Monetary Fund have each weighed in as well.^2,3

Exchange-Traded Funds

ETFs were created in the 1990s as a product that offered investors the flexibility and cost-efficiency of exchangetraded securities while maintaining the diversification offered by mutual funds. Typically, ETFs track an index (e.g., the S&P 500 or the Nasdaq-100) and trade continuously. Unlike shares in a mutual fund, which may be traded only once at the end of each trading day, investors may buy or sell shares in ETFs continuously. They often provide additional liquidity