{
  "id": "R45318",
  "type": "CRS Report",
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      "id": 585594,
      "date": "2018-09-24",
      "retrieved": "2019-12-20T20:51:42.697065",
      "title": "Exchange-Traded Funds (ETFs): Issues for Congress",
      "summary": "Exchange-traded funds (ETFs) are common ways for Americans to invest. An ETF is an investment vehicle that, similar to a mutual fund, offers public investors shares of a pool of assets; unlike a mutual fund, however, an ETF can be traded on exchanges like a stock. The catchall category of exchange-traded products (ETPs) includes all portfolio products that trade on exchanges. \nU.S. ETF domestic listings stand at more than $3.4 trillion, making ETFs among the most important investment methods and critical components of the financial system. The first U.S. ETF was introduced in 1993 to track the S&P 500 stock index. That was the first time a public investor could buy or sell a basket of stocks in a single publicly traded share. It was considered as one of the most important financial innovations in decades and one that transformed the asset management industry. In the ensuing 25 years, ETFs have grown to become a mainstream investment vehicle held by 6% of U.S. households and representing 30% of all U.S. equity trading, according to data from Investment Company Institute and iShares. \nThe rapid growth of the ETF market has simultaneously elevated its importance in the global financial system and brought risk and regulatory considerations to the fore. A key consideration is ETFs\u2019 behavior under market stress. ETFs drew media attention when market distress occurred in 2010, 2015, and 2018. These events have led to global discussions of ETFs\u2019 effects on financial stability. Although the events did not seem to leave long-lasting impacts on financial markets, they revealed aspects of ETFs\u2019 vulnerability that could not be observed under normal market conditions. \nGiven ETFs\u2019 scale of representation in financial markets, it is likely that they would be affected by any future financial crisis (e.g., their value would fall with the value of other assets), but it is uncertain whether ETFs would also amplify it. At the center of the debate over ETFs and financial stability is \u201cliquidity mismatch,\u201d which is often discussed under the context of the difficulty of buying and selling ETFs during a market downturn. This mismatch points to a relatively complex ETF operational structure that has generated misunderstanding. \nNot all ETFs are created equal. The majority of ETFs are \u201cplain vanilla\u201d index-tracking products that are considered lower risk. There is also a growing subset of complex, higher-risk ETFs that are sources of concern over financial stability and investor protection. To add to the confusion, the industry does not currently have a consistent naming convention to differentiate the types of products that vary in risk exposure. \nLastly, despite ETFs\u2019 common usage, the Securities and Exchange Commission (SEC) has not yet established a comprehensive listing standard. As such, each aspiring issuer must typically be approved by the SEC under an exemption to the Investment Company Act of 1940 and other securities regulations. The SEC proposed a new ETF approval process on June 28, 2018, that would replace individual exemptive orders with a single rule for plain vanilla ETFs. The proposed approach excludes certain higher-risk ETFs and mandates new disclosures and other conditions generally on index-based and actively managed ETFs.",
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}