ETFs Could Be Catalyst for Next Financial Crisis

“It's not clear that anyone understands the impact on the market that [ETFs] could have as a whole given the scale and speed at which the ETF sector has grown,” says Gillian Tett, US managing editor of the Financial Times. Tett draws parallels between the collateralized debt obligations market, widely blamed for the financial crisis of 2008, and the ETF industry which is becoming more complicated as it expands.

“Investors may not understand the risks” of new ETFs, some of which are based on highly volatile assets. Many are tied to commodities, an especially uncertain industry given recent price spikes and massive capital inflows. The increasing scale of certain ETFs also poses significant risk, as the demise of a large fund has the potential to trigger collapse in others. Download the full podcast for more on the dynamics of ETFs and how investors can minimize risks in the ETF sector.

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