April 5, 2024

In Steven Spielberg’s original Jurassic Park, the chaos theorist played by Jeff Goldblum chastises the theme park father’s folly in resurrecting dinosaurs by noting: “Your scientists were so preoccupied with whether or not they could, they didn’t stop to think if they should.” The exchange-traded fund industry should take note.

This is a heady time for the ETF world. Overall inflows last year topped $1tn for the first time. Coupled with the buoyancy of financial markets, this means that the ETF industry is on the cusp of crossing the $10tn of assets under management mark.

The industry is also broadening. Bond ETFs took in about $244bn in 2021 — a new record and the third $200bn-plus year in a row. Many traditional investment groups are also embracing the ETF structure for active strategies, underscoring how it has transcended its genesis as a passive vehicle.

Yet like so often before in the annals of financial innovation, a brilliant idea can be taken to extremes. To stretch the Jurassic Park metaphor, the ETF industry has gone well beyond cloning triceratops, and has for some time now manufactured tyrannosaurs.

This is not a new phenomenon. The first “leveraged” and “inverse” ETFs — which use derivatives to juice returns of an underlying index, or deliver the opposite performance of it — were first launched in 2006. “Thematic” ETFs dedicated to niche areas like pet care or cyber security have proliferated for more than a decade. But it…

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