The SEC has chosen an interesting area for scrutiny and proposed rule making: derivatives enhanced ETFs. While they've been around for years, these vehicles by necessity use derivatives to achieve their return objectives.
A U.S. Securities and Exchange Commission proposal to clamp down on how funds use derivatives has industry officials worried that some exchange-traded funds may have to close or change their investment strategy. The rule proposed....would require funds to hold cash reserves to cover potential future losses on derivatives. Funds could agree to limit their derivatives exposure to 150 percent of net assets, or, if they passed a separate risk test, keep derivatives exposure as high as 300 percent of net assets. A number of popular ETFs could be disabled by the rule, some analysts said. Some 163 ETFs representing $26.9 billion in assets use derivatives to double, triple, or provide the opposite of the returns of an index, such as the S&P 500.