The emergence of synthetic ETFs has a "lot of parallels" with the synthetic collateralised debt obligation (CDO) market that sparked the global financial crisis, warns ASIC chairman Greg Medcraft.
Speaking at the 2015 Annual Stockbrokers Conference in Sydney on Friday, Mr Medcraft referenced his former career in investment banking on Wall Street.
The ASIC chairman was global head of securitisation at Société Générale based in New York for seven years until June 2007.
"I saw securitisation emerge as a good ... tool to assist the funding of the real economy, but then it all got crazy and wild in the late 2000s," Mr Medcraft said.
The synthetic CDO market, which bundled up pooled assets such as mortgages, was an area that got "out of hand", he said.
"I must say the emergence of synthetic ETFs troubles me because it has a lot of similarities with synthetic CDOs," he said.
The ASIC chairman said he saw a lot of parallels between the two asset classes.
"You have to question: 'How do you define an ETF?' I think there’s a danger of abusing the 'brand' ETF," Mr Medcraft said.
Simple, straightforward ETFs are a "good thing for investors" because they are clear, transparent, and cash-backed, he said.
By the same token, synthetic ETFs may well be fine for sophisticated investors who fully understand what they're buying, Mr Medcraft said.
"But it’s not the same – cash [-backed] and synthetic is not the same. That’s my concern with those," he said.