Why New SEC Chair Is Investigating Commodity ETFs

The new Securities and Exchange Commission (SEC) chairman is concerned about the level of authority used with the introduction of new exchange traded funds (ETFs), especially those that focus on commodities.

SEC Chairman Mary Schapiro has brought concern to the forefront of the public’s awareness that the introduction of ETFs have not been monitored closely enough. The leveraged or inverse ETFs, as well as the commodity ETFs, are of the greatest concern. Gail MarksJarvis for The Chicago Tribune explains that Schapiro plans to examine both types of ETFs, in addition to an array of complex ETFs that have flooded the market the last few years.

Also of note is that she would be adding expertise to her staff and working along with the Commodity Futures Trading Commission, which recently was said to be investigating popular oil funds to see if they’re affecting the markets. Schapiro said the the SEC’s level of expertise hasn’t kept pace with some of the complexity of some ETFs hitting the markets.

Many critics are not supportive of the ETFs that let investors short the market, or sectors of the market, and they claim that these let investors force segments of the markets to fall, such as financials. They contend that manipulation causes individual stock prices to plunge harder and faster than they would based on fundamentals.

Schapiro is also looking at 150 hedge funds, two dozen in the municipal bond market and 50 involving credit default swaps.

We think that Schapiro will find that the ETF industry is clean. These funds, particularly the leveraged ones, operate just as they should. It’s also unfair to blame these ETFs for moving the markets - there have been plenty of other things going on to hurt the markets, and it’s not right to place the blame squarely on the shoulders of leveraged funds.

One industry expert points out that if you look at the net assets in both the long and short funds, the levels are net long in the majority of the fund pairings most of the time. If anything, they’re having a positive effect on the market.

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