"Are they the new weapons of mass destruction?" Jack Reed (D-Rhode Island) asked that question today in a hearing on the exchange-traded mutual fund business. A fundster, a regulator, an exchange executive and an ETF critic all testified on ETFs' role in the marketplace.

Noel Archard, managing director at BlackRock iShares [see profile] unit, sought to deflate concerns about ETFs' role in market volatility and other issues. He also urged regulators and legislators to "put in some classification systems to essentially create some speed bumps" to help distinguish different types of exchange-traded products from each other.

Eric Noll, executive vice president of transaction services at Nasdaq OMX, echoed Archard's defense of ETFs' role in the marketplace, urging those worried about issues like capital formation to support other efforts to help emerging companies find new funding. He expressed skepticism about the possibility that ETFs' prevalence had discouraged any company from conducting an initial public offering and said he'd never heard of such an occurrence.

Harold Bradley, chief investment officer of the Ewing Marion Kauffman Foundation, was the only real ETF critic testifying this morning. The Kauffman Foundation is a non-profit organization focused on promoting entrepreneurship and chaired by non-other than Thomas McDonnell, president and CEO of mutual fund back-office titan DST.

Bradley expressed concerns about ETF-shorting, especially when "short interests in these big ETFs that represent more than 100 percent of outstanding units." He also noted the extremely high percentage of ETF trades that are never executed or fail, a symptom, in his eyes, of the advantages held by market-makers.

And Eileen Rominger, director of the Securities and Exchange Commission's (SEC) division of investment management, reiterated the SEC's efforts to study further the issues surrounding ETFs, especially leveraged and inverse ones.

Reed asked a few scary rhetorical questions, like "Do ETFs put our economy at risk?" and the aforementioned "Are they the new weapons of mass destruction?". Yet he presented no dire warnings or sweeping regulatory changes himself, merely asking questions of the witnesses and offering some vague positive feedback to Archard's suggestion to better differentiate between different types of exchange-traded products.

Reed led the "Market Microstructure: Examination of Exchange-Traded Funds" hearing this morning in his Securities, Insurance, and Investment Subcommittee of the U.S. Senate Committee on Banking, Housing and Urban Affairs [watch the hearing here].

Reed's Republican counterpart, Senator Mike Crapo (of Idaho, the subcommittee's ranking Republican), was called away thanks to his involvement with the "gang of six" working on budget and deficit issues, so the hearing consisted of four witnesses testifying, followed by Reed questioning those witnesses.

For now, Reed seemed to be simply on a kind of fact-finding mission, but he promised to return to the subject matter soon enough.

"This will not be the last we talk about ETFs," Reed said in closing the hearing. 

Stay ahead of the news ... Sign up for our email alerts now
CLICK HERE