Despite gathering over $1.2 trillion in assets, ETFs have developed a bad-boy image. They have even come into the crosshairs of government and industry regulators and the press. Consider a sample of recent headlines: "Are ETFs Too Dangerous for Most Investors?" (MarketWatch, May 2012); "Watchdogs Coming Up Short on ETF Risks," (Slate, April 2012); "ETF Controversy Puts Online Brokers In Odd Spot" (Reuters, May 2012).
Now, a small group of ETF companies are organizing an effort they hope will help tamp down some of the negative noise by bringing together those most affected by it.
In April, senior executives at several ETF companies launched the National Exchange Traded Funds Association (Netfa), whose mission is "to educate institutional and retail investors, as well as the advisor community, on the benefits and uses of ETFs," according to its press release. The group plans to provide the financial media with industry statistics and commentary on ETF-related issues and lobby regulators and government agencies to advance the industry's needs.
For most financial advisors, news of a new industry trade association is probably as exciting as yesterday's lunch. But with ETFs under attack on several fronts, it's an effort that could help advisors too, says Netfa vice chairman Adam Patti (who is also the chief executive officer at ETF provider Index IQ).
"In this environment, people are looking for a scapegoat for market volatility, and ETFs have certainly been that," he says. "The hope is that maybe we can get out in front of the negative news before the damage snowballs, so advisors don't have to spend time on the phone with clients to correct misinformation."
Many financial advisors devoted a good amount of phone time to putting out fires with clients in late 2010, when a well-publicized study by the Kauffman Foundation fingered exchange-traded funds as the culprit behind the "flash crash." A press release on the report noted ominously that "it is these derivatives and not the phenomenon known as high-frequency trading (HFT)-commonly critiqued as contributing to the flash crash of May 6, 2010-that pose serious threats to market stability in the future."
The drama continued to unfold in October of last year when a Senate subcommittee explored the role ETFs played in igniting market volatility. Leveraged and inverse ETFs have also landed in the hot seat as researchers and regulators look at their roles in end-of-the-day trading volatility. In May, the Financial Industry Regulatory Authority (Finra) levied $9.1 million in penalties on four brokerage firms, alleging they sold leveraged and inverse ETFs to investors who did not understand them.
Taking the heat off of ETFs will take a lot of time and money, and so far, Netfa has little of either. The group consists of three executives from ETF firms United States Commodity Funds, Index IQ and ALPS. Its Web site, located at nationaletf.org, is a title page with a few descriptive sentences.
But the new voice of the industry hopes to get louder soon. "We are rounding up commitments from several other ETF companies," says Patti. "The vast majority of ETF issuers know this is an important thing to do."
In addition to promoting and supporting ETFs' public image, Patti says the group also hopes to clear up misconceptions about the product, such as the funds' frequent confusion with exchange-traded notes. Netfa will also talk about some of the more thinly traded ETFs that member firms offer, which are often overlooked by advisors and the public. "Beyond the big ETFs are innovative products that don't trade as frequently, but add value by providing different asset exposures and different levels of correlation," Patti says.