With all the major themes already covered in the world of exchange traded funds (ETFs), fund providers are now rushing to churn out new “extreme ETFs” that utilize short selling, leverage and derivatives in an attempt to entice investors and to capture a greater market share. Not everyone is on board, though.
“Hedge fund replicators,” or hedge fund-esque ETFs that offer greater liquidity and transparency than traditional hedge funds, are just one example of the newly mutated form of ETFs available to basically anyone with some money in a brokerage account, comments Edward Robinson for Bloomberg in a terrific article worth reading.
Other ETF options offer easy access and exposure to volatile commodities futures trading, and some “leveraged and inverse” securities promise double or even triple the returns on moves in major indexes and benchmarks. [Alternative ETFs: Sophisticated Strategies in a Simple Package.]
This new branch of extreme ETFs has acquired more than $40 billion globally, spread through more than 260 funds in just four years. Advocates of these extreme funds say that such ETFs may help investors curb losses and nimbly navigate the markets if used judiciously – the Greek debt crisis has triggered volatile swings, and short and leveraged-short funds capitalized on such swings. [Two Uses for Inverse and Leveraged ETFs.]
Vanguard‘s retired founder John Bogle, though, opines that extreme ETFs may be the next financial tool to backfire on investors. Bogle states that these complex securities subvert the time-honored discipline of buy-and-hold investing, and goads investors to speculate and chase after returns.
Andrew Mathieson, founder and managing member of Fairview Capital Investment Management LLC, comments that he “couldn’t possibly justify putting clients’ money” into these new extreme ETFs “because they’re brand new, not tested, and [he doesn’t]know what’s in them.”
The Securities and Exchange Commission (SEC) has already moved in and deferred approval of new ETFs that use derivatives as the providers review whether there are too much leverage and complexity in the offerings aimed at retail investors.
Assets under ETFs have more than doubled to $1.1 trillion since 2005, and with 833 new funds in the works, the market could well increase another 20% to 30% this year. It’s safe to say that ETFs are far from a fad. [Leveraged and Inverse ETFs Have Their Day.]
Max Chen contributed to this article.
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.