Exchange traded funds pose a serious risk of causing a new financial crisis and should be put under the spotlight so that the signs of a market crash are spotted early, according to the Financial Stability Board.
The FSB, which represents the world's main regulators and central banks, said it had seen "a number of disquieting developments" in the market for ETFs and said funds must do more to ensure that investors fully understood the risks posed by them.
In particular, the FSB said it was worried that ETFs could exacerbate the impact of a future crisis as many funds are not fully-backed by the asset they are invested in.
"The expectation of on-demand liquidity may create the conditions for acute redemptions pressures on certain types of ETFs in situations of market stress, which could in turn affect the liquidity of the large asset managers and banks active in this market," said the FSB.
Lord Turner, chairman of the Financial Services Authority, is among the senior regulators to have warned of the risks presented to the financial system by ETFs, in particular those that offer leverage.
ETFs have become popular among retail investors in recent years as they offer a cheaper way for the public to get exposure to assets they would normally find it difficult to invest in such as physical commodities such as gold and oil.
Jonathan Compton, founder of Bedlam Asset Management, has warned repeatedly of the dangers of ETFs and said a crisis in the market was a question of "when not if".
"Retail investors will get crushed in any crash, but large pension funds also have huge holdings in ETFs too," said Mr Compton.
The ETF market is currently reckoned to be worth more than $1.2 trillion (£733bn), having more than doubled in size over the last five years.
While early ETFs were backed entirely by whatever asset they were invested in, newer funds have been created which use derivatives to mirror the performance of the actual asset.
Developments such as these are at the heart of concerns about what would happen in the event there was ever a run on the market.
"There is a risk that investors massively demand redemption," said the FSB.
For some ETF providers, more of their income now comes from lending out the securities they hold on behalf of their investors to third-parties than they make in management fees.
Many suspect that ETFs are at least partially responsible for many of the asset bubbles that have sprung up around the world, pumping up the price of commodities ranging from coffee to lean hog meat.
Gold ETFs are one of the largest fund types, with the largest holding reserves worth more than $30bn.
Source: http://www.telegraph.co.uk
The FSB, which represents the world's main regulators and central banks, said it had seen "a number of disquieting developments" in the market for ETFs and said funds must do more to ensure that investors fully understood the risks posed by them.
In particular, the FSB said it was worried that ETFs could exacerbate the impact of a future crisis as many funds are not fully-backed by the asset they are invested in.
"The expectation of on-demand liquidity may create the conditions for acute redemptions pressures on certain types of ETFs in situations of market stress, which could in turn affect the liquidity of the large asset managers and banks active in this market," said the FSB.
Lord Turner, chairman of the Financial Services Authority, is among the senior regulators to have warned of the risks presented to the financial system by ETFs, in particular those that offer leverage.
ETFs have become popular among retail investors in recent years as they offer a cheaper way for the public to get exposure to assets they would normally find it difficult to invest in such as physical commodities such as gold and oil.
Jonathan Compton, founder of Bedlam Asset Management, has warned repeatedly of the dangers of ETFs and said a crisis in the market was a question of "when not if".
"Retail investors will get crushed in any crash, but large pension funds also have huge holdings in ETFs too," said Mr Compton.
The ETF market is currently reckoned to be worth more than $1.2 trillion (£733bn), having more than doubled in size over the last five years.
While early ETFs were backed entirely by whatever asset they were invested in, newer funds have been created which use derivatives to mirror the performance of the actual asset.
Developments such as these are at the heart of concerns about what would happen in the event there was ever a run on the market.
"There is a risk that investors massively demand redemption," said the FSB.
For some ETF providers, more of their income now comes from lending out the securities they hold on behalf of their investors to third-parties than they make in management fees.
Many suspect that ETFs are at least partially responsible for many of the asset bubbles that have sprung up around the world, pumping up the price of commodities ranging from coffee to lean hog meat.
Gold ETFs are one of the largest fund types, with the largest holding reserves worth more than $30bn.
Source: http://www.telegraph.co.uk
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