When the Financial Stability Board was established a couple of years ago, it declared that one of its goals was to produce better “early warning” systems of looming financial trouble spots. Now it is starting to turn this rhetoric into reality. Investors should pay attention.
Last month, the FSB issued a small advisory report entitled “Potential financial stability issues arising from recent trends in Exchange-Traded Funds”. Unsurprisingly, this did not cause a storm. After all, ETFs seem as dull as ditchwater to most politicians; almost as boring as the world of CDOs (collateralised debt obligations) looked back before 2007.
But this little FSB report deserves wider attention. For one thing, it has not emerged by chance: on the contrary, it was published because some institutions such as the Bank of England have been quietly sounding alarm bells about ETFs for some time. But, secondly, the issues raised are sobering; indeed, if you read this report, it is hard not to feel a sense of deja vu.