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ETFs Leveraged Ball of Confusion: BlackRock

Wednesday, 5 Oct 2011 | 1:43 PM ET

If I didn’t know better, I’d think BlackRock CEO Laurence Fink is doing his best to make sure his firm isn’t tarred and feathered by an Exchange-Traded Fund debacle, if one ever occurs.

BlackRock's headquarters in New York.
Mark Lennihan
BlackRock's headquarters in New York.

BlackRock, the world’s biggest operator of ETFs, without much fanfare Tuesday published an 8-page manifestocalling for greater transparency among ETFs.

Much of BlackRock's concern is focused on leveraged ETFs, which use derivatives to produce outsized returns when the market is moving up and down.

And this isn’t the first time it's gone after them. A month ago Fink, speaking at an industry conference, called leveraged ETFs “toxic.” This came after multiple European regulators issued papers raising concerns about the possibility of the “systemic risk” caused by ETFs.

Now BlackRock, which owns iShares, says that what started as fairly straightforward products that mirrored relatively broad benchmarks, such as the S&P 500 or individual contrary indexes, has today “become more complex and sometimes confusing.” (BlackRock doesn't run any leveraged ETFs.)

“When first introduced,” BlackRock said, “ETFs brought investors new levels of transparency and disclosure among other benefits. However, increasingly complex ETFs and related products have sometimes failed to maintain that standard and have introduced new risks to these products.”

Among BlackRock’s recommendations: To limit the kind of funds that can call themselves ETFs.

For example, “products that are designed only for professional or short-term investors, such as exchange traded products that use leverage or inverse strategies, would not be permitted to use the ‘ETF’ label.”

Likewise, commodity funds backed by the actual commodity should be called an exchange-traded commodity; if they’re not backed by the physical commodity, then they should be called an exchange traded note.

And get this: BlackRock said it “welcomes” the ETF scrutiny of regulators.

My take: This is the ultimate in crisis PR before the event. After all, this always happens on Wall Street: Something interesting or good is created and then if it’s successful—it becomes a potentially self-destructing monster.

Questions? Comments? Write to HerbOnTheStreet@cnbc.com

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