As indicated by the National Stock Exchange's fund flow reports at the start of each month, ETFs have taken off in a major way here in the United States. In the years following the initial launch of the first ETF, SPDR S&P 500 ETF (SPY), the number of instruments available to U.S. investors has ballooned to over 1,000, and total assets have ascended above the $1 trillion mark. Around the world, the number of ETFs products has surpassed 2,000.
The majority of the products currently available are considered plain vanilla ETFs, boasting characteristics similar to SPY. However, the dramatic expansion of this industry has also ushered in a growing number of products that utilize increasingly complex techniques and assets in order to meet their desired goals.
In a recent report, Blackrock lays out its concerns regarding this latter class of instruments. The firm feels that in many cases these non-traditional products, though boasting the "ETF" name, provide limited transparency. Investors unfamiliar with unique attributes of these alternative instruments may be left vulnerable to additional risk. The firm presents and outlines a number of recommendations that they feel will help to resolve this issue.Perhaps the most dramatic suggestion is the implementation of a sweeping global classification system. According to the report, this would essentially divide the universe of "exchange-traded products" into different classes, based on their structure and underlying holdings. For example, while traditional products like SPY would continue to be considered ETFs, those that utilize leverage and inverse investing strategies, or are backed by swaps, could no longer carry the ETF label. For example, based on Blackrock's classification scheme a fund like the Direxion Daily Financial Bull 3x Shares (FAS) would be considered an ETI, or "exchange traded instrument." As is already done in the United States, unsecured debt securities designed to track the performance of an index would be labeled as ETNs. Finally, iShares Gold Trust (IAU), ETFS Physical Palladium Shares (PALL) (PALL) and other physically backed commodity products would be labeled as exchange traded commodities. According to the requirements laid out by Blackrock, any commodity-focused ETF that is not physically-backed will not be considered an ETC.