New Fed chairman says he doesn't think ETFs had a part in the market correction

Federal Reserve Chairman Jerome Powell said exchange-traded funds were not the main reason behind the market decline earlier this year.

“ETFs are a particular form of fund, and I don’t think they were particularly at the heart of what went on, on those days,” Powell said.

The S&P 500 fell officially into correction territory in early February, down more than 10 percent from its record reached in January. After the decline, the benchmark pared more than half its losses in recent weeks.

Traders blamed the sell-off on increasing worries about rising inflation and the prospect for a faster pace of interest rate hikes by the Federal Reserve. The U.S. 10-year Treasury yield, which moves inversely to bond prices, had climbed to a four-year high of 2.95 percent earlier in the month after the strong January jobs report.

But certain securities that resemble ETFs — exchange-traded notes — got some of the blame for the correction as well. Traders argued that popular ETNs tracking the Cboe volatility index caused additional volatility in the markets, making the sell-off worse.

One particular ETN, the VelocityShares Daily Inverse VIX Short-Term ETN, had to be shut down by Credit Suisse after losing most of its value in one session during the market pullback.

Powell didn’t specifically mention these products in his testimony.

He said the Fed is working with other government agencies to further investigate whether ETFs overall pose a risk to the financial system.

“But it’s something we’re talking to our fellow agencies [about], particularly the SEC, I think, would be best positioned to look at this. It’s a question we’re looking into,” he said.

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