From the March 01, 2011 issue of Futures Magazine • Subscribe!

ETF Guide: A rising tide

2011: Speculative growth?

One of the biggest stories in trading the last year has been the evolving regulatory framework. Lawmakers have responded to the 2008 financial crisis with a list of new laws and expectations for regulators. While OTC derivatives and more complex institutional products have received the most attention, retail products, such as ETFs, are not immune to scrutiny.

The regulations most likely to affect the ETF market are position limits. The Dodd-Frank financial reform legislation required the Commodity Futures Trading Commission (CFTC) to have energy and metals market position limits in place by January — a deadline missed. However, on Jan. 13, the CFTC did vote to open the position limit proposal to public comment.

How the regulations will impact the retail ETF market is unclear. Major players, such as Blackrock, which operates the iShares ETFs, have vigorously lobbied against restrictive limits.

Leveraged ETFs are another area that has drawn regulatory attention. Indeed, in early 2010, the Securities and Exchange Commission restricted the listing of new leveraged ETF products. As is obvious from the funds flowing into these products, however, investors aren’t ready to turn their back on leveraged ETFs just yet.

Accessibility is an ETF trend that is likely to continue. TD Ameritrade is the latest retail securities broker to offer commission-free ETF trading. It joins Charles Schwab, Fidelity and Vanguard as major retail players to waive commissions for some ETFs.

Despite massive changes to the regulatory framework in the United States, ETFs continue to persevere and have demonstrated value as a vehicle for both active speculation and passive investment. As the pieces fall into place, ETFs will be poised to take full advantage of a more-certain regulatory future.

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