Exchange-traded funds are developing in a similar way to the shadow banking system that almost brought down the world’s financial system in 2008, according to Terry Smith, chief executive officer of Tullett Prebon Plc. (TLPR)
Without owning the underlying assets, ETFs can move in the opposite way to which investors expect, Smith said
“The drivers and implications of the recent wave of financial innovation in ETF markets warrants closer surveillance of potential vulnerabilities by financial stability authorities to ensure that the market grows in a sustainable and safe way,” the FSB said.
ETFs are also vulnerable to unlimited short-selling because of the ease of creating new shares, according to Smith, who said short-selling in some funds has reached 1,000 percent. “The scope for a short squeeze is tremendous,” he said.