Exchange traded products: Taxonomy, risk and mitigations

Abstract

This work provides a comprehensive overview of Exchange-Traded Products (ETPs), focusing on their emergence as a preferred investment option for investors prioritizing asset allocation over stock picking. It discusses market practices, performance standards like GIPS, and the transformative impact of ETPs since their introduction in Canada in 1990. Regulatory shifts have disintermediated commercial banks, while the rise of passive investment vehicles like ETFs has contributed to what some call the ”zombification” of markets, marked by increased risk from excessive leverage and concentrated exposure to specific assets and strategies. The study also explores risks, mitigation strategies, transparency, liquidity, and systemic risk implications, highlighting the need for effective regulations to safeguard investors and maintain financial stability, fueled by growth concerns.