(Bloomberg News) Laurence D. Fink, chief executive officer of BlackRock Inc., stepped up his criticism of some exchange-traded funds such as those provided by Societe Generale SA, saying he didn't want them to damage the industry.
So-called synthetic ETFs, offered by firms including Societe Generale's Lyxor Asset Management SA and Deutsche Bank AG, introduce a layer of complexity and counterparty risk that investors may not be aware of, Fink said today at a conference held in New York by Bank of America Corp.'s Merrill Lynch unit. The synthetic funds generate returns through derivatives contracts rather than owning underlying securities as traditional ETFs do.
"If you buy a Lyxor product, you're an unsecured creditor of SocGen," Fink said. Providers of synthetic ETFs should "tell the investor what they actually are. You're getting a swap. You're counterparty to the issuer."
BlackRock, whose ETFs are almost all backed by the stocks, bonds or commodities they seek to track, has been campaigning for more disclosure by derivatives-based funds and has urged regulators to ban the use of the term ETF for those funds. The effort has drawn counter-attacks from competitors in Europe, where derivatives-based products capture about 40 percent of ETF assets.
Lyxor Chairman Alain Dubois said in an interview last month that BlackRock's warnings ignored risks associated with securities lending by physical ETFs.
SocGen's Response
Physical ETFs "expose their holders to undisclosed levels of counterparty risk to typically undisclosed counterparties," Nizam Hamid, deputy head of Lyxor ETFs, said in an e-mailed response to Fink's comments. "The unregulated use of securities lending has resulted in meaningful losses in the past."
BlackRock's iShares unit is the world's largest ETF provider with $612 billion in assets as of Oct. 31, according to BlackRock data. Lyxor is the second-biggest in Europe with $41.1 billion, behind Deutsche Bank's $48.5 billion and iShares' $111 billion.
Synthetic ETFs have lost popularity among investors in Europe his year, reporting $1.86 billion in withdrawals in October, compared with $3.11 billion deposits for physically backed funds.
The U.K. Financial Services Authority in a June report raised concerns about counterparty risk and over the quality and liquidity of synthetic ETFs' collateral. The International Monetary Fund and the Bank for International Settlements have also raised concerns about the funds' risks.