A recent article from Bloomberg suggests that the SEC’s recent liquidity and derivatives proposals could cause investor assets to flow into riskier products. According to Dave Nadig, Director of ETFs at FactSet Research Systems, the proposals “will have one significant unintended consequence: they will drive investors into less well-regulated products like ETNs.” The article notes that the use of ETNs introduces credit risk that is not present with ETFs, making them riskier for investors. Additionally, ETNs are not registered investment companies.
Nadig suggests that new requirements imposed by the liquidity proposal would mean that “every broad corporate and high-yield bond fund and every broad emerging markets fund would be in trouble.” By his calculations, funds holding nearly $225 billion in assets would run afoul of the rules as proposed. He also estimates that the derivatives proposal would potentially affect $25 billion in assets.