Complaint: Leveraged Funds Are Bringing the Market Down
Fact: There are a lot of things making it difficult for the government to save financials, and it isn’t right or fair to put the blame on the shoulders of leveraged ETFs. Trading and interest in them has undoubtedly increased, but billions of shares trade hands each day in funds of all types.
A small fraction of that is leveraged ETFs, and they seem to be getting a far greater percentage of the blame. One industry expert points out that if you look at the net assets in both the long and short funds, the levels are net long in the majority of the fund pairings most of the time. If anything, they’re having a positive effect on the market.
Complaint: They’re Not Buy-and-Hold Investments
Fact: Well, that is true. They’re not. But this isn’t exactly news – many leveraged ETF investors have been able to successfully hedge their portfolios for short-term periods. These ETF providers readily acknowledge that these types of funds are meant to hedge risk, not funds around which one should plan their retirement.
Complaint: Leveraged ETFs Just Don’t Work
Fact: Leveraged ETFs operate exactly as they should – they reset daily. Over a period of time, you’re going to see internal compounding that will affect the returns. This isn’t a flaw in the funds – this is a mathematical fact that is impossible to avoid. If you invested in a leveraged ETF over a period of months and the market went down 20%, a 2x short leveraged ETF wouldn’t go up exactly 40%.
The SEC is ultimately going to find that there’s nothing illegal or underhanded about these products. They’re doing what they’re supposed to do, they’ve proven immensely popular and the SEC would not impose limits or consider doing away with such innovative products.
Read the disclosure, as Tom Lydon is a board member of Rydex Funds.