In this issue:

Regulators Turn to the Stability Risks Presented by the Explosive Growth of Exchange-Traded Funds

Global regulators have raised concerns over the increased prevalence of exchange-traded funds (“ETFs”) as investment vehicles, as well as the new uses to which these vehicles are being put. The Financial Stability Board (“FSB”), which is a global coordination organization of the world’s financial regulators, published a report detailing its concerns in April 2011. The Bank for International Settlements and the International Monetary Fund have each weighed in as well.

ETFs were created in the 1990s as a product that offered investors the flexibility and cost efficiency of exchange-traded securities while maintaining the diversification offered by mutual funds. Typically, ETFs track an index (e.g., the S&P 500 or the Nasdaq-100) and trade continuously. Unlike shares in a mutual fund, which may be traded only once at the end of each trading day, investors may buy or sell shares in ETFs continuously. They often provide additional liquidity support to the securities that make up the underlying assets of the ETF as well.