In the early hours of Thursday morning, trader Kweku Adoboli from UBS was arrested and detained in connection with unauthorised trading which is estimated to have cost the bank $2bn.
Although the Swiss bank said no customer accounts were affected, the fact Adoboli is said to have worked as a director of ETFs has put the investment vehicles under the spotlight once again.
In his "Straight Talking" blog Smith said ETFs were regarded by many investors as the same as index funds when they are "clearly not".
"Some ETFs do not hold physical assets of the sort they seek to track. They are ‘synthetic’ and hold derivatives. This gives rise to a counterparty risk, and as we saw with the UBS incident, some interesting risks within the counterparties supplying the basket of derivatives."
Many of the big ETF providers have parent companies that also act as the counterparty to their swap-based ETFs.
For example, iShares is a subsidiary of BlackRock and db X-trackers is part of Deustche Bank.
Back in April the Financial Stability Board (FSB) issued a note on potential financial stability issues arising from recent trends in ETFs.
The note highlighted recent developments in the ETF market, which had increased product variety and, in some cases complexity, and had extended the asset class beyond its "plain-vanilla" nature.
Swap-based ETFs were one area of concern for the FSB, which said: "Since the swap counterparty is typically the bank also acting as ETF provider, investors may be exposed if the bank defaults.
Therefore, problems at those banks that are most active in swap-based ETFs may constitute a powerful source of contagion and systemic risk."
UBS has said it could report a third quarter loss due to the loss on trades associated with Adoboli.
As Smith said, if the counterparty cannot pay out the ETFs it backs will fail.
Alan Miller, chief investment officer and founding partner of SCM Private, is a staunch defender of ETFs.
He has previously responded to the FSB report and to Smith’s previous blog posts lambasting ETFs.
Miller’s firm, which manages ETFs, has carried out research that showed mutual funds practice stock-lending just as much as ETF providers, but that it is a less scrutinised practice.
Someone with a moderate view on the issue is Peter Sleep, senior portfolio manager at 7IM, which invests in ETFs on behalf of its clients.
"The FSB and other regulators are absolutely right to look at ETFs’ role in the shadow banking system. It is potentially an issue and should be regulated and looked at. The FSB pointed out the stock borrowing going on and said it was a risk.
"Allan Miller’s response is perhaps a little extreme, they focused on ETFs because they are a growing market and they simply did a mind dump of everything that was a potential risk," Sleep said.
