“Worries over opacity and liquidity could temper small-time savers’ enthusiasm for Exchange Traded Funds (ETFs), set to be boosted by a UK regulatory revamp of fees on products sold to private investors.Retail investors are flocking to ETFs, which typically track baskets of shares, bonds or commodities and are traded like stocks. Assets under management of ETFs traded on European exchanges rose 43 percent to 183 billion euros ($230.8 billion) in June, according to data from Thomson Reuters funds research group Lipper.But critics warn that some of these funds — originally designed for sophisticated institutional investors — hold hidden risks and often lack the transparency touted as a key selling point,” Reuters Reports.

“There isn’t a regulatory definition of ETF. In the institutional marketplace people ought to be able to take the due diligence so it’s not necessarily an issue but in the mass retail market you are in a different place,” said Julie Patterson at the Investment Management Association, which represents the British funds industry.

Reuters goes on to say, “British watchdog the Financial Services Authority (FSA) has gone so far as to explicitly recommend their use, as part of its effort to move to a model where advisers charge clients, rather than pocketing commissions from fund firms. And providers of ETFs believe retail investors, many of whom are disgruntled with performance over the last few years, will soon account for up to half the market in Europe, where they currently represent around 30 percent.”

“If you get the shift to a fee based system in Europe, that split between institutional and retail will end up in the same ballpark as the U.S. market,” said Nizam Hamid, head of sales strategy at BlackRock’s ETF arm iShares’ Europe.

 ”But investors could quickly find themselves exposed to complex and opaque packages of synthetic securities as they venture deeper into the ETF market, and the Bank of England has warned people not to get carried away by their success.”

“One risk is that the benefits of ETFs become outweighed by complexity, opacity and contingent risks… It is important that the industry does not overreach when innovating in the ETF arena,” it said in its Financial Stability Report.

“While most ETFs hold straightforward baskets of assets, some also hold derivatives of the underlying securities, including swaps, futures and options, and seek to outperform the index they track. Many ETF providers also lend both shares in the fund and the underlying securities to investors, such as hedge funds, who want to take short positions and bet on a falling price. The Bank of England raised questions about transparency surrounding the practice,” Reuters Reports.

See More To The Reuters Story: HERE

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