The European Securities and Markets Authority has added its voice to the growing chorus of concerns over exchange-traded funds, warning in a new consultation paper that it may introduce measures to restrict their availability to retail investors.

ESMA is concerned that retail investors may be led to invest in very complex investment products which are difficult to “understand and evaluate”, and that the current regulatory requirements are insufficient for UCITS ETFs and structured UCITS funds.

In particular, ESMA wants to develop safeguards to cover activities such as securities lending by physical ETFs. As to synthetic ETFs, the body proposes that prospectus information should "at least include information on the underlying of the investment portfolio or index, the type of collateral which may be received from the counterparty and the risk of counterparty default and the effect on investors’ returns."

ESMA has taken particular issue with the transparency of ETFs, which was once much lauded by proponents as one of these vehicles’ best attributes. In the case of actively managed ETFs, investors should be clearly informed about the risks involved in this, ESMA says; in the case of leveraged ETFs, the fund’s leverage policy and a description of how the daily calculation of leverage impacts on investors’ returns over the medium to long term should also be explained, it says.

ESMA joins a growing number of industry figures and watchdogs who in recent months have poured cold water on the booming ETF industry. As well as fears that such vehicles may not be as transparent as they claim to be, counter-party risk with regards synthetic ETFs has also emerged as a top concern.