Leveraged exchange traded funds have taken heat recently amid allegations they added to stock market volatility in August, but Wall Street industry analysts say the claims are exaggerated.
The impact of leveraged ETFs on the market is “marginal at best,” Credit Suisse analysts wrote in a recent report. Leveraged ETFs were “most likely not to blame for the recent market swings,” they added.
These high-octane financial products allow investors to get 200% or 300% of the market’s performance over certain time periods, such as one day. Some of the products are inverse bearish products that move in the opposite direction of the market they track.
Earlier this week, The Wall Street Journal reported the Securities and Exchange Commission was looking into whether leveraged ETFs magnified market volatility last month. [SEC Reportedly Probing ETFs]
“With equity volatility doubling recently, some of the same topics that came up two years ago during the credit crisis have resurfaced as people look for possible culprits. ETFs have received some blame for the increasing volatility, although we believe it’s a case of confusing correlation with causation,” Credit Suisse said in a separate report.
“It’s understandable for the investment community to look for possible explanations in periods of extreme volatility,” it noted. [Do Leveraged ETFs Really Move the Market?]
One of the issues raised in the WSJ article was that leveraged ETFs may be adding to volatility near the end of the trading day as the managers rebalance the portfolio.
However, the last hour of U.S. stock trading this year hasn’t been relatively more volatile than the rest of the day, said Phil Mackintosh, head of Credit Suisse’s global portfolio strategy team. This contrasts with the credit crisis in 2008, when volatility did increase in the final hour of trading.
Leveraged ETFs are being “unfairly blamed” for the higher volatility in stocks, Mackintosh said in an interview.
“The VIX is elevated, there are a lot of macro events driving markets and we’ve seen record outflows from mutual funds. Blaming ETFs for everything that’s going on at the close due to the rebalance trade is pretty naive, really,” he said.