The International Monetary Fund raised concerns over synthetic exchange traded funds yesterday adding its voice to concerns raised by the Financial Stability Board, the global body that co-ordinates financial regulators.
The IMF in its Global Financial Stability report, said current restrictions on the use of derivatives in synthetic exchange traded funds would not be sufficient to prevent systemic risks from arising during times of market stress.
The fund also pointed out that the disproportionately large size of some ETFs as compared to market capitalisation of their underlying indices represented a risk of disruptions in some markets on heavy trading in ETFs.
It noted that the growth in the ETF industry was likely to accelerate due to cost advantages as also the ease of access to emerging markets they could provide.
But it added that providers would likely venture into more complex instruments to both replicate and magnify returns in relatively closed economies.
It said some emerging markets could present liquidity issues as the creation and redemption of ETF units could be more difficult in times of increased market stress.