Leveraged exchange traded funds (ETFs) have been under suspicion by market watchers, and the accusation that these funds add to market volatility is incorrect.
Leveraged ETFs are not intended for a buy-and-hold investor, and it was not intended for those who do not follow the markets. In fact, this particular type of ETF was designed to give short-term traders leveraged long or short exposure to a variety of indexes, says Jeff Benjamin for Investment News.
The basic concept of this fund was actually introduced in 1984 in mutual fund form, but the ETF version emerged in 2006 and is quickly gaining appeal. Market critics were quick to blame the market volatility that occurred on these types of funds, as they suspected that these leveraged funds made up 75% of late-day trading volume.
While leveraged ETFs account for $35 billion in the market, in reality leveraged ETFs represent about 5% of the $50 billion worth of trading volume during the last half-hour, according to an analysis by Credit Suisse Securities LLC in New York.
Ultimately, the argument that leveraged ETFs could grow to dominate volume and spark runaway volatility seems to be born from incomplete math. On a daily basis, these funds correlate with their indexes well and they perform as they should.
If you’re looking for these as a long-term investment, it just won’t work. People have to understand these funds, and they can’t be surprised about what happens if they use them for a purpose for which they were not intended.
The Securities and Exchange Commission (SEC) has been looking at them, but there’s been no reason to believe that they’ve found or even will find anything wrong with how these funds work.
All in all, it’s incorrect to think that these funds are influencing the markets in any way.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.