* Firms worry they will be lumped in with exotic ETFs
* 40 pct of European EFT assets are synthetic
By Jessica Toonkel
NEW YORK, April 26 As European and U.S.
regulators step up their focus on complex exchange-traded
products, companies that offer exchange-traded funds are worried
that investors will confuse their products with the ones under
Along with the rapid growth of the global $1.7 trillion ETF
market, some of the product offerings have become more complex.
Exotic offerings that do not invest in underlying securities --
like synthetic ETFs in Europe and exchange-traded notes (ETNs)
in the United States -- have raised concerns among regulators
that investors do may not understand what they are buying.
The problem is more acute in Europe, where 40 percent of all
ETF assets are synthetic.
In turn, companies in the United States that offer more
traditional exchange-traded funds -- which are registered under
the 1940 Investment Act and are regulated like open-end mutual
funds -- are worried investors may lump their products with
their more complex and controversial cousins and avoid them
"We may not be perfect, but in the (exchange-traded product)
game we are by far the best game in town," said Jonathan
Steinberg, chief executive of WisdomTree, at a NYSE
Euronext press event Thursday.
In Europe, ETFs have become controversial because many are
"synthetic," meaning they do not actually own underlying
securities and instead use derivatives to replicate returns. In
Europe, about 40 percent of ETF assets are in "synthetic
products," according to BlackRock Inc.
Europe's market watchdog, the European Securities and
Markets Authority, has proposed mandating that ETF providers
offer greater disclosure about how they operate.
This controversy has caused a headache for U.S. ETF
providers, the majority of which do not offer synthetic ETFs,
said Noah Hamman, chief executive and president of
AdvisorShares, at the NYSE event.
"I am more concerned that ... people are looking at European
exchange traded products and applying it to the U.S.," Hamman
said. "We spend some amount of time educating people on this."
U.S. ETFs have their own issues. Regulators have said they
are taking a closer look at leveraged and inverse ETFs, which
are designed to amplify short-term returns by using debt and
derivatives, and are more suitable for professional traders than
for long-term retail investors.
At the same time, recent swings in an exchange-traded note
that makes bets on market volatility have drawn the attention of
the U.S. Securities and Exchange Commission, the Financial
Industry Regulatory Authority and the Massachusetts attorney
The focus on ETNs came after the Credit Suisse-managed
VelocityShares Daily 2x Short-Term TVIX.K ETN lost half its
value in just two days earlier last month.
ETNs and ETFs are often lumped together by investors and the
media, but ETNs differ from ETFs in that they are not portfolios
of investments. Instead, ETNs are contracts in which the issuers
agree to pay investors returns that are equal to the investments
they aim to track.
A panel of three ETF providers and one expert at the Capital
Link Annual Closed-End Funds and Global ETFs Forum Tuesday in
New York all mentioned investor confusion over all these
different products as one of their biggest concerns.
Among them: Alex Depetris, vice president in the db-X Group
of Deutsche Bank, which offers commodity and currency-based ETFs
as well as exchange-traded notes, said "investor understanding
of the different products" was his biggest concern.