Leveraged exchange traded funds (ETFs) have seen a lot of popularity and garnered a lot of attention with the recent market decline.
These ETFs have the ability to be two to three times long or short the market; all wrapped up in a single tradeable security.
Some pundits believe these specialized ETFs have, in fact, increased market volatility in the last hour of trading. But many investors and people in the media are having trouble getting their arms around the truth. The SEC has been looking very closely at these funds and have had dialogue and visits with ETF providers who are offering them. Here are the facts:
Complaint: Leveraged ETFs Are Too Readily Available and the Average Investor Will Hurt Themselves
Fact: What’s wrong with choices? We’re all adults here. Investors deserve to have options, and the more, the better. Give investors some credit. I know our readers on ETF Trends, and they’re a smart, educated, affluent bunch. It’s up to you and I to get the necessary education so we don’t shoot ourselves in the foot.
Furthermore, the fund companies that issue leveraged ETFs readily admit that their funds aren’t for everyone. They’re very open about the risks. As much as the fund companies want to make money, they also want their investors to be successful, too. It behooves them to help investors do that. As Jason Zweig of The Wall Street Journal noted in his Saturday column, it’s all about understanding risk and knowing what you’re getting into with these funds.
Another point to consider is that it’s hard to know exactly who’s buying these funds, but based on the volume being traded, it would suggest that it’s largely institutional. It’s true that anyone can buy them, but the big players are likely the ones buying them at this point, so their accessibility is probably moot for now.
Complaint: They Exist So Investors Can Sidestep Margins Rules
Fact: It’s really not that sinister. Before leveraged ETFs, investors had to borrow from a broker to short with credit, then have a required amount of reserve capital before doing so. These limitations don’t exist with leveraged ETFs, but I doubt that most investors are arching their eyebrows and laughing wickedly at the thought of sidestepping margins rules.
The less exciting truth is that these funds have simply made it easier for the average investor to employ a strategy he or she might not have had access to before. Additionally, margin rules were set up to protect banks, not investors, so this argument doesn’t hold much water. Investors can only lose what they put into these funds.