By Tim McLaughlin
(Reuters) - BlackRock Inc 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.
"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."
Fink spoke during a conversation with Deutsche Bank co-CEO Anshu Jain in a broader discussion about regulating financial companies.
Leveraged ETFs account for 1.2 percent of the $2.5 trillion in global ETF assets under management. At the end of April, there were nearly 270 ETF funds with $30.3 billion in assets, said Deborah Fuhr, managing partner of ETF research firm ETFGI LLP.
A leveraged ETF uses financial derivatives and debt to amplify the returns of an underlying index.
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.
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.
(Reporting By Tim McLaughlin; Editing by David Gregorio and Tom Brown)