Since they burst onto the scene several years ago, the coverage of exchange-traded funds has been overwhelmingly positive. The industry has been credited with reducing expenses for all types of investors, democratizing entire asset classes, and bringing a new level of transparency and tax efficiency.
But recent months have seen a number of publications and institutions attempt to slam the ETF industry for perceived structural flaws, misleading products, and an adverse impact on broader financial markets. BusinessWeek issued a blanket warning against commodity ETPs, essentially accusing issuers of causing contango in futures markets for their own gain. Last month, a report circulated alleging that ETFs–especially those with big net short positions–were in danger of “collapsing” and potentially leaving inventors empty-handed [see Why An ETF Can't Collapse].
The most recent attack on the ETF industry came from the Kauffman foundation, which issued a lengthy report that outlined the causes of “market distortions” and the factors that have prevented new growth companies from going public. The culprit for these developments: the ETF industry, which the report bashes for a wide range of faults.
The Kauffman report is, of course, little more than an attempt to generate publicity (an attempt that has been wildly successful, as CNBC and other mainstream media outlets have been quick to run with the seemingly-juicy story). It was hardly surprising to learn that Kauffman’s chairman is the head of a company that provides recordkeeping services to the mutual fund industry. The 80-plus pages of analysis, stats, and charts give the illusion of a scholarly work, but the credibility is tarnished by even a cursory examination of the allegations.
The rebuttals to the claims in the Kauffman report have been swift, numerous, and generally researched more thoroughly than the 84 page paper that likely took months to prepare. Below, we highlight three of the most informative and intelligent responses to the Kauffman report–hopefully some calming reading for anyone still concerned about ETFs:
WisdomTree, the New York-based issuer best known for its fundamental-weighted ETFs and currency products, has been the most active voice from within the ETF industry in response to the Kauffman report. WisdomTree President & COO Bruce Lavine recently issued an open letter, detailing what he believes to be a “serious misunderstanding of the structure and operation of ETFs” in the Kauffman report. Lavine offers up direct responses to the concerns raised in the Kauffman report, including the reality of short selling ETFs, the role of ETFs in the Flash Crash, and the impact of ETFs on the IPO market.
The WisdomTree response calls out areas of the report that are factually incorrect, and offers up corrections and explanations to many of the report’s errors. “The claims were so broad and misplaced that ETFs were lucky not to be associated with global warming and the BP oil spill,” notes Lavine.
PowerShares Exec:Charges Off Target
Ben Fulton, Managing Director at Invesco PowerShares, recently appeared on CNBC to offer his take on the allegations made in the Kauffman report. Fulton tackled many of the most disconcerting claims head-on, explaining the reasons for ETF fails, the role of ETF sponsors in the market, and even revisiting the role of ETFs in the “Flash Crash.”
Hougan: “Entertaining Work Of Fiction”
Perhaps the most detailed and scathing critique of the Kauffman report came from Matt Hougan, who lays out the most serious allegations of the 84-page document. “All of this is wrong,” writes Hougan. “It’s the ghost story investors might tell themselves around a campfire: an entertaining work of fiction.” Hougan offers up detailed (yet easy-to-understand) explanations for why several of the primary claims of the report are wrong or misleading. The issues addressed include:
- Threat to market stability
- ETFs are setting the price of small cap companies–the tail is wagging the dog
- Potential for short interests to cause ETF collapses
- Impact of ETFs on IPO market
If the Kauffman report has you spooked, take a closer read (or listen) to these rebuttals.
Disclosure: No positions at time of writing.