Finally, the report worries about an operational problem in ETFs sparking a crisis. That’s certainly possible, but ETFs are among the simplest financial products and unlevered. When MF Global failed with inadequate segregation of customer funds, there were weeks of uncertainty and major jurisdictional complexity. When Lehman Brothers failed, with its complex business and high leverage, it was a multiyear nightmare. If an ETF dealer failed suddenly, some of its counterparties might be uncertain which trades done shortly before the failure would be honored, but it’s hard to see it leading to a systemic crisis or taking long to resolve.
Instead of asking, “would it be bad if an ETF dealer blew up?” the relevant question is, “given someone blows up, would you rather it was an ETF dealer or some more complicated and leveraged financial institution?”
I don’t mean to suggest the ESRB report is useless. It’s a pretty good summary of ETF research over the last decade, and it mentions many positives about ETFs. But its title question is not useful to anyone. Anything “can” cause a systemic crisis, but some things make them less likely and less damaging if they occur.
Aaron Brown is a former managing director and head of financial market research at AQR Capital Management. He is the author of "The Poker Face of Wall Street." He may have a stake in the areas he writes about.
This column was provided by Bloomberg News.