Funds and ETFs

BlackRock CEO says leveraged ETFs could 'blow up' whole industry

Reuters with
Fink's ETF warning is 'very important'

BlackRock Chief Executive Officer Larry Fink said on Wednesday that leveraged exchange-traded funds contain structural problems that could "blow up" the whole industry one day.

Fink runs a company that oversees more than $4 trillion in client assets, including nearly $1 trillion in ETF assets. Leveraged ETFs use debt to boost returns.

"We'd never do one (a leveraged ETF)," Fink said at Deutsche Bank investment conference in New York. "They have a structural problem that could blow up the whole industry one day."

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Fink made his remarks during a conversation with Deutsche Bank co-CEO Anshu Jain in a broader discussion about regulating financial companies.

Larry Fink, CEO of BlackRock Investments.
Adam Jeffery | CNBC

Fink said he believes regulators should focus on the structure of financial products.

"If you want to create a safer and sounder marketplace, it has to be at the product level," Fink said.

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Leveraged ETFs are allowed, but staff at the U.S. Securities and Exchange Commission has issued warnings about them. Leveraged ETFs seek to deliver multiples of the performance of the index or benchmark they track.

Regulators say individual investors may not realize that the investment products are designed to achieve their performance objectives on a daily basis rather than over the long term.

In one real-life example given by the SEC, an unnamed leveraged ETF seeking to deliver twice the daily return of an index fell by 6 percent, even though that index gained 2 percent over a 5-month period.