Exchange Traded Funds have emerged as the perfect investment vehicle for uncertain times. The funds include baskets of assets such as stocks and bonds, or derivatives that reflect their value. Unlike mutual funds, they can be traded all day long, allowing investors to get in and out of markets in an instant. It is almost as if someone designed them with the risk-on, risk-off era in mind.
As the ETF sector has grown in size and power, a debate over their effect on the markets has emerged. Global ETF assets are growing nearly 40 percent a year, and have reached $1.4 billion. While ETFs are still just 10 percent the size of the conventional mutual fund industry, they punch far above their weight. accounting for one third of the value of all U.S. equity trades and 10 percent of the number of actual trades.
It should come as no surprise that the industry is drawing more scrutiny. Two researchers at the non-profit Ewing Marion Kauffman Foundation in Kansas City -- chief investment officer Harold Bradley and vice president of research and policy Robert Litan -- warned in white paper and in prepared Senate testimony that ETFs were a source of volatility and systemic financial risk. ....