Leveraged Funds: Tail Not Wagging the Dog, ETF Analyst Says
September 8th at 5:19pm by John Spence
Allegations that leveraged exchange traded funds are somehow responsible for the elevated volatility in the stock market recently are way off base once the category’s relative trading volume and assets are considered, says a respected ETF analyst.
Although ETF transactions accounted for about 40% of the total volume in equity markets in August, leveraged funds represented only about 13% of total ETF trades during the most volatile period early in the month, says Scott Burns, director of ETF research at Morningstar. Leveraged funds account only 5% of total ETF assets.
Leveraged ETFs in the grand scheme are “a grain of sand on the beach,” Burns told CNBC on Wednesday.
The Securities and Exchange Commission is looking into whether leveraged ETFs magnified the volatile swings the stock market experienced last month, The Wall Street Journal reported.
In a telephone interview this week, Burns said the tail is not wagging the dog, and that fire directed at leveraged ETFs may be an instance of confusing correlation and causation. [Don't Blame ETFs for Market Swings]
“The media has a thirst to find a boogieman to explain why stocks don’t always go up,” the analyst said.
Markets have grown increasingly complex with lightning-fast computers and high-frequency trading playing a larger role, and ETFs have become a part of the new landscape.
ETFs, which are baskets of securities listed on exchanges that trade like individual stocks, are a financial innovation that has been “beneficial to investors” in part because they’ve provided individuals with “low-cost, transparent” vehicles, Burns noted.
Rather than focusing on leveraged ETFs supposed role in boosting market volatility, a more relevant examination would include options, futures and other financial products that increase leverage in the system, the analyst added. The size and scope of these markets dwarf leveraged ETFs.
Leveraged exchange traded products hold assets of $35 billion, with bearish short and ultra-short products accounting for about $22 billion of the total, according to a recent report from Barclays Capital. There is about $1 trillion invested in all ETFs.
In fact, the largest leveraged ETF in August doesn’t even track stocks. The ProShares UltraShort 20+ Year Treasury (NYSEArca: TBT) bets against U.S. Treasury bonds.
“It doesn’t impact the equity market,” Burns told CNBC.
