Wiandt On MarketWatch: ETF Education Key

By Olivier Ludwig,

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The rapid growth of the ETF industry and increasing complexity of exchange-traded products have created the need for more intensive education efforts to ensure that investors know what they're getting, IndexUniverse.com Publisher Jim Wiandt told MarketWatch.com.

Wiandt's comments come at a time when the ETF industry is facing criticism from different pockets of the investment industry. Earlier this month, for example, the Kansas City, Mo.-based Kauffman Foundation argued that ETFs are hurting the IPO market for small start-up companies, and that unless regulators made changes, ETFs, and not high-frequency trading, could trigger another "flash crash."

"I think it's nonsense, most likely," Wiandt told MarketWatch.com reporter Alistair Barr, sharing his views on what might have triggered the flash crash on May 6, when, in less than 30 minutes, the Dow Jones industrial average plummeted almost 1,000 points before recouping a bit more than half of those losses. About 70 percent of all the securities that suffered broken trades that day were ETFs.

"I think it's a market structure issue. I hate to lay it at the feet of regulators, but I will to some degree," Wiandt said. "Emphasis on speed, at the expense of everything else ... has overrun regulations."

Education Crucial

Wiandt said that about a third of all U.S. equity trades now involve ETFs, noting that in itself didn't worry him.

"In terms of people not understanding what these products do, I am worried about that. Product development and complexity have overrun the education process," he said.

He specifically singled out leveraged products and those that give investors exposure to commodities. Leveraged products double or triple daily returns on a given index, making them appropriate for only the most savvy investors. Commodities products based on futures, meanwhile, subject investors to the vagaries of variables such as contango, a condition when spot prices are lower than futures prices that can seriously detract from returns.

Overall, Wiandt characterized the sometimes-critical comments focused on exchange-traded products as growing pains and emblematic of how important ETFs and ETNs have become to financial markets.

"Over the last year, you've seen a lot of attacks on ETFs and exchange-traded products. I think that probably has to do with the fact they've gotten so big and gotten attention," Wiandt said, adding that the flash crash and the central role ETFs played that day added to the attention.

The first ETF, the SPDR S&P 500 ETF (NYSEArca:SPY) was launched in 1993, and assets in U.S. ETFs are likely to reach the $1 trillion milestone soon, perhaps by the end of this year. ETF assets totaled $942.3 billion as of Nov. 17, according to data compiled by IndexUniverse.com. By comparison, assets in U.S. mutual funds are about $11 trillion.

Don't forget to check IndexUniverse.com's ETF Data section.

Copyright ® 2010 Index Publications LLC . All Rights Reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing ETFs
Referenced Stocks: SPY

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