SEC commissioner warns about use of leverage in ETFs

SEC commissioner warns about use of leverage in ETFs
Products that employ derivatives to boost their returns threaten the reputation of the ETF market, says Robert Jackson.
NOV 12, 2018
By  Bloomberg

Investment products that use derivatives to improve returns are threatening the reputation of the $3.6 trillion market for exchange-traded funds, according to one of five commissioners at the Securities and Exchange Commission. "The risk with levered ETFs is that the entire asset class will be painted with this brush," said Robert Jackson Jr., adding that he fears Americans will buy and hold these products in their retirement accounts and then get a nasty surprise when they lose their money. Mr. Jackson spoke at an event organized by Bloomberg and the CFA Society of New York Friday. Exchange-traded products that use leverage account for just 1% of the exchange-traded market. They've faced greater scrutiny since February, when soaring volatility prompted one note to close and caused an ETF to lose 90% of its value. The SEC's Fixed Income Market Structure Advisory Committee recently proposed new terminology to differentiate these funds and notes from other types of ETPs. The proposals make a lot of sense, but they may not be a complete solution, Mr. Jackson said. He was one of two commissioners who earlier this year demanded that more be done to address geared, or leveraged, ETFs as officials debate whether to ease the path to market for straightforward funds via the so-called ETF rule. "I want to be sure we address it before we give the industry what they want in the ETF space," Mr. Jackson said. The commissioner, who holds one of the Democratic party seats on the SEC, also reiterated his opposition to companies that have two classes of publicly traded shares. However, he said it's up to the exchanges, rather than indexers or fund issuers, to encourage these firms to move toward equal voting rights. The Council of Institutional Investors, with the backing of money managers including BlackRock Inc. and T. Rowe Price Group Inc., recently petitioned the New York Stock Exchange and Nasdaq Inc. to eliminate dual-class listings with a seven-year sunset clause. "I hope they'll take seriously their role in corporate governance," Mr. Jackson said of the venues. "To the degree our exchanges want to be treated as, and understood as, self-regulatory organizations entitled to special treatment under our securities laws, they should regulate." (More: ETF alphabet soup obscures market risks)

Latest News

Advisor moves: RBC swipes $1.7B UBS team, Baird duo departs for LPL's Linsco channel
Advisor moves: RBC swipes $1.7B UBS team, Baird duo departs for LPL's Linsco channel

RBC Wealth Management's latest move in New York adds an elite eight-member team to its recently opened Westchester office.

Stifel star broker, Chuck Roberts, leaves firm under cloud of investor complaints
Stifel star broker, Chuck Roberts, leaves firm under cloud of investor complaints

Stifel – so far - is on the hook for more than $166 million in damages, legal fees and settlements in investor complaints involving Roberts, a 35-year industry veteran.

iCapital secures $820M in latest funding, hits $7.5B
iCapital secures $820M in latest funding, hits $7.5B

The giant alt investments platform's latest financing led by T. Rowe Price and SurgoCap Partners, along with State Street, UBS, and BNY, will fuel additional growth on multiple fronts.

Merrill Lynch on the hook for $3.7M after clients claimed sale of unsuitable private equity
Merrill Lynch on the hook for $3.7M after clients claimed sale of unsuitable private equity

Some investors recently have seen million dollar plus decisions by FINRA arbitration panels involving complex products decisions go their way.

What does it take to feel 'financially comfortable' or 'wealthy' in 2025?
What does it take to feel 'financially comfortable' or 'wealthy' in 2025?

New report shines a light on how Americans view wealth today.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.