BlackRock distances itself from products that have freaked out the market

Key Points
  • Much of this week's market tumult arose from huge losses to exchange-traded products that work off volatility.
  • BlackRock, the biggest issuer in the world, says it does not offer such products and it wants greater regulation.
Santelli Exchange: Liquidity, volatility and fragility
Santelli Exchange: Liquidity, volatility and fragility

The world's largest money manager and exchange-traded fund provider is distancing itself from the products blamed for much of this week's tumultuous market activity.

BlackRock said it neither endorses nor provides the leveraged exchange-traded notes that tumbled as market volatility soared.

Primarily, the firm sought to draw a line between the exchange-traded funds it provides under the iShares umbrella and the various ETNs that use leverage and derivatives to provide inverse returns for gains and losses in various indexes.

"Inverse and leveraged Exchange-Traded Products are not ETFs, and they don't perform like ETFs under stress. That's why iShares does not offer them," BlackRock said in a statement Monday night, hours after the Dow industrials lost 1,175 points, the worst single-day point decline in market history.

Two ETNs have attracted much attention: the ProShares Short VIX Short-Term Futures and the VelocityShares Daily Inverse VIX Short-Term ETN. Both trade using leverage and provide inverse returns to the market's "fear gauge" known as the Cboe volatility index — the VIX. When the VIX falls, the two products rise. When the VIX soared Monday, both securities suffered severe losses.

BlackRock's statement did not mention any specific products. However, it encouraged regulators to step in and provide market clarity in leveraged products.

Larry Fink, chairman and CEO of BlackRock.
Cameron Costa | CNBC

"BlackRock strongly supports a regulatory classification system that would label levered and inverse ETPs differently than plain-vanilla ETFs in order to clarify for both regulators and investors the risks associated with those products," the firm said.

The ProShares fund lost another 84 percent Tuesday, while trading in the Velocity note was halted.

BlackRock manages $5.7 trillion for clients and is the leader in ETF assets with $1.4 billion under management. The $3.4 trillion ETF industry has seen a continuous rush of money from investors, who like the low costs and ease of trading the products provide.

However, the funds also have come under fire for the amount of exotic offerings that have been introduced, including many that provide double, triple and even quadruple the returns, positive and negative, of the indexes they track.

In an interview Tuesday afternoon, billionaire investor Carl Icahn called derivatives "fault lines" that eventually will lead to a market implosion.

"The market is a casino on steroids," Icahn told CNBC's "Fast Money Halftime Report."

CNBC's Jim Cramer characterized the VelocityShares Daily Inverse VIX a "phony product" and "toxic cigarette for the market."

Credit Suisse said it is ending trading in its Daily Inverse VIX on Feb. 20. ProShares told clients Tuesday that "the performance on Monday of the ProShares Short VIX Short-Term Futures ETF (SVXY) was consistent with its objective and reflected the changes in the level of its underlying index."

Correction: An earlier version misstated the issuer of one of the two products that had been halted. The Velocity note was the one halted.