We have filed with the Securities and Exchange Commission (SEC) to create monthly beta ETFs. However, there is currently no timetable for the approval of those ETFs. We believe such products could be enormously popular because such products would need to be monitored less frequently than the current daily beta funds and would therefore presumably be attractive to a larger group of tactical investors.
Also, the introduction of monthly beta funds would further highlight the goals of the current daily beta funds, which would further education of investors about what those funds do. Monthly beta funds will complement rather than replace daily beta funds and will hopefully help the industry continue to evolve and grow.
After the controversy concerning leveraged and inverse ETFs, do you expect much to change in the leveraged and inverse ETF industry?
The controversy around the products has primarily been about the compounding issues – the funds seek daily returns, not returns for longer periods. The investment world is inclined to look at the performance of a product on a standalone basis for long periods. That approach does not really work with these products and such an approach reflects a misunderstanding about what the products are intended to do and how they are used.
Our ETFs and funds are tools to be used in tactical portfolio management. From our perspective, the controversy has exaggerated the level of misunderstanding – I feel that many people who do not use the products have been commenting on the products. Products offered by ProShares and Direxion are among the most liquid names in the marketplace, which means that people understand how to use the funds and are monitoring and trading them actively.
Further, more than $30 billion has been raised in leveraged index ETFs in the last two years or so. If there was serious dissatisfaction about the products, you would not have seen such asset growth. I am not dismissive of the controversy, but I think that the overwhelming bulk of users understand how the funds work and use them properly. The products work well for a segment of the investing universe; they do not suit the eye of a much larger group and that group has been more responsible for the criticism than the actual users. (Assets in bear funds in 2009).
Do you feel that any positives have come out of the controversy?
The controversy has helped broaden the message about the goals of the funds and has essentially accelerated our educational efforts. I object to the tone of much of the criticism and reject the notion that the misunderstanding was due to a lack of effort by the providers. (How to use leveraged and inverse ETFs).
If you look at our prospectus and our website – which have not changed that much since FINRA weighed in on the products – you will realize that we have made remarkable efforts to educate about the implications of seeking leveraged daily betas. (The fight over leveraged and inverse ETFs).
To the extent that the attention has complemented our efforts, we are pleased. Please note that our interest in and emphasis on education is not regulatory response. We want investors to understand how to use our products because educated users have the greatest chance of success and successful investors will return to our products.
For more on leveraged and inverse ETFs, visit the category.
Read the disclaimer, as Tom Lydon is a board member of Rydex Funds.